CHK. Sell/Avoid:Stock issuances has troubling implications

On Wednesday, CHK filings with the SEC noted their intent to raise up to $1.8B via stock issuance for "general corporate purposes, funding capex...etc " and "payment for land leases". This filing comes after repeated (and recent) comments by the company that liquidity was not an issue and if pushed .." could always reduce 2009 capex further..". (Recall they are still looking to grow 2009 production by about 18% y/y. Further troubling was the timing of the filing, just before the Thanksgiving weekend, when most investors will be away from their desks.

The illogic of issuing stock to fund an aggressive drilling and land acquistion program in a period of depressed commodity prices and with a depressed common stock price, is at odds with the company assertions concerning liquidity. The company is at the end of their "liquidity generation" rope.

My take is the company is more stressed for cash than they have let on and for reasons not yet apparent to us. We know there are no buyers of assets, no credit to be had. Not yet spoken about, but will soon become a topic, is the year end SECPV10 calculations. These will be performed at significantly lower prices than last year. The result is much lower SEC PV10 valuation and the possibility (and to the surprise of investors) of lower reserves as out year reserves (long tail reserves of Shale plays) fall out of the calculation as uneconomic at current low prices.

It is interesting that CHK is using its common stock as if it were its cheapest capital, not its most expensive. While I noted earlier they may have no other option, it doesnt hurt that the CHM/CEO no longer has any stock holdings. Having had to sell his entire holdings to meet margin call earlier this year, he has no skin in the game and it may set up a cheaper entry point to reacquire shares.

My calculation of the stocks value is $26/bbl, using only 1P reserves, Midstream assets valued at a EVx of 6x and a $7/mcfe realized price.

This creates the following valuation metrics on TTM:
EVx EV-mcfe/PD (1P) EV-mcfe/PDP

Today 5.4x $1.99/mcfe $3.22/mcfe
Historical (8yrs)
Average 5.6x $1.91/mcfe $2.72/mcfe
High 6.9x $2.83/mcfe $3.80/mcfe
Low 3.5x (2001) $1.19/mcfe (1999) $1.66/mcfe (1999)

Current NAV share price calcuation of $26/share suggest a buy, while these other metrics suggest more downside than upside. Especially so given CHK's seemingly deperation driven use of equity and resulting implied liquidity issue. Avoid/Sell this stock

Note that in times of stress, investors and lenders have tended to value companies on Proved Developed reserves only. This is the valuation to focus on now.