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Fairholme Cuts Chesapeake Energy from its Portfolio

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Chesapeake Energy

Fairholme Capital revealed in its 4Q14 13F filing that it had eliminated its stake in Chesapeake Energy (CHK) by selling about 536,900 shares. The position had accounted for 0.17% of the fund’s portfolio during the third quarter.

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Overview of Chesapeake Energy

Chesapeake Energy Corporation (CHK) is a US energy exploration and production company with operations covering the following shales:

  • Barnett
  • Eagle Ford
  • Haynesville
  • Marcellus
  • Mississippian Lime
  • Niobrara
  • Utica

Chesapeake Energy is currently the second largest producer of natural gas and the 11th largest producer of liquids in the US. The company produces more than 720,000 barrels of oil equivalent per day and operates both in the upstream and downstream spaces. Its operations can be broadly categorized into the following two segments­­:

  • Exploration and Production, which accounts for nearly 40% of its revenues
  • Marketing, Gathering, and Compression, which represents the remaining 60%

4Q14 earnings miss estimates

For 4Q14, Chesapeake Energy reported revenues of $5.05 billion, reflecting a 11% YoY growth, and exceeded analyst estimates of $4.5 billion. The revenue growth was driven by higher realized and unrealized hedge gains. Production averaged 729,000 boe (barrels of oil equivalent) in 4Q14, reflecting a 12% increase when adjusted for asset sales.

On a per-share basis, net earnings came to $0.11, well below analyst estimates of $0.24. In comparison, Chesapeake Energy’s peers Southwest Energy (SWN), Range Resources (RRC), and Cabot Oil and Gas (COG) all exceeded analyst expectations. For a more detailed analysis of Chesapeake’s fourth quarter results, please read Chesapeake Energy’s 4Q2014 earnings reflect market volatility.

Investors seeking to gain exposure to CHK and its peers can consider the Energy Select Sector SPDR ETF (XLE). CHK and its peers account for 4% of XLE’s holdings.

Marcellus and Utica Shale assets

In the fourth quarter of 2014, Chesapeake Energy completed the sale of certain assets in the southern Marcellus and eastern Utica Shales for net proceeds of $5.1 billion. CHK entered into senior unsecured revolving credit facilities with a $4.0 billion limit and for a total term of five years. This credit facility enabled CHK to release $6.0 billion of proved reserve-based collateral.

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