Chesapeake Energy Corporation (CHK), Anadarko Petroleum Corporation (APC): Will Someone Please Clean Up These Dirty Balance Sheets?

With Prices Low, Things Got Bad

For the 12 months ended September 2012, Denning’s same $500 million market cap sample increased their debt to a staggering 1.44 times cash flow.  And while cash flow per share for the sample peaked near $8 per share in 2008, cash flow per share has now slipped to just $5.

To make matters worse, capital expenditures, or CAPEX, have increased to $7.20 per share, representing 144% of cash flow.  And no wonder the industry needs financed!  Firms kept spending, even when energy prices dropped.

M&A Picks Up

Much like banks after the financial crisis, deleveraging needs to take place in the exploration and production sector.  One way for this to happen is for firms to spin off assets.  For example, Chesapeake could continue to sell off its joint venture interests and other holdings in an effort to stay capitalized.

Denning brings up two other good points. He cites Range Resources Corp. (NYSE:RRC) and Anadarko Petroleum Corporation (NYSE:APC) as two firms that could be taken over by a larger firm or financial buyer.  For example, Range’s “liquids-rich reserves are tailor-made for the revival in U.S. petrochemicals manufacturing.”

Firms like Dow Chemical are producing plants that will utilize natural gas, because gas has become a cheaper input in Dow’s production process.  So, it wouldn’t be a stretch to think that an industrial company could eye-up Range.

As for Anadarko Petroleum Corporation (NYSE:APC), Denning mentions that its mix of U.S. reserves and foreign projects could be attractive to an acquirer.  The company’s $40.9 billion market cap would carry a hefty price tag, but a potential acquirer could purchase projects or business lines in pieces.  Specifically, international projects can be a benefit because energy prices in foreign areas like Europe and Asia trade at higher levels than in the U.S.

Overall, in this market exploration and production companies need to tighten their belts and clean up their balance sheets.  Otherwise, there could be an intervention by someone else who can.

The article Will Someone Please Clean Up These Dirty Balance Sheets? originally appeared on Fool.com and is written by Chris Marasco.

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