Jim Cramer interviewed Chesapeake’s Aubrey McClendon. Here is the transcript:
Jim Cramer: Now, that Washington might be taking a momentary back seat to the fundamentals. It’s time to circle back, pick through the rubble of this market. Find companies that reported really good news last week, when everybody else was freaking out about Washington. No one was paying attention to anything good. Take Cramer fav Chesapeake Energy, CHK. The second largest natural gas producer in the country, atop 15 producer of liquids. The company is leading positions in many of these hot, unconventional the shell plays in the country. Anadarko Basin, Eagle Ford, Fanfel, Marcela Shale’s, among many others. Chesapeake is in the sweet spot of the oil and gas boom here in the United States. It’s the most aggressive driller in the country. And it is a textbook example of a natural gas oriented company that decided to make the switch to producing more liquids like oil. Since they fetch a much higher price than natural gas, it hasn’t forsaken natural gas. Now, last Thursday, Chesapeake reported a thing of beauty quarter, seem to get totally lost in the shuffle. Everyone’s way too worried about the chaos in Washington to pay any attention to any good news. The company delivered 76 cents of earnings per share, five cent beat. Much better than expected revenue 65%, year over year. But, more important Chesapeake confirmed rumors about a major new oil-rich discovery in the Utica shale of eastern Ohio. Get used that term because, they’re saying that Utica is similar but, likely superior to the eagle ford shale in south Texas. And, by the way, the Eagle Ford shale, that’s probably the hottest shale out there right now. Chesapeake has an astounding 1.25 million acres in the Utica shale which they say could be worth — ready? $15 to $20 billion to shareholders. Capitalization of the equity side of the company is just a little north of that. In other words this one find is about equal to the entire worth of the company if you don’t include the debt. Now look, if that news had cup out on a normal week I think the stock would have shot through the roof. However it calls out during fear and chaos of last week. Now Chesapeake is trading less than a point higher than where it was before the quarter. That is ridiculous! I mean its nuts! Chesapeake’s already given you a 47% gain since I got behind, at $23.30 last October. I think it has much more room to run. Especially, after this huge Utica Shale find in Ohio. So, let’s start with Aubrey McClendon the fantastic co-founder, chairman, and CEO of Chesapeake energy. Find out more about the Utica and get his view on the energy future. Mr. McClendon, welcome back to Mad Money.
Aubrey McClendon: Good Afternoon Jim. You got me all jacked up here listening to you.
Jim Cramer: Well, how could I not? Aubrey, I gotta tell I’m reading through Utica and I’m thinking — first of all I’ve never heard of it. Alright? I knew it was underneath a parcel somewhere. But, second, Ohio? I mean what is oil doing in Ohio?
Aubrey McClendon: That’s a great question. And, actually, Ohio and Western Pennsylvania were of course the birth place of the oil and gas industry in the US in the 1850s. And so, here we are back again to this area between Pittsburgh and Cleveland and down to — through Youngstown, and Akron, and canton and wheeling, West Virginia. This is the heart that was once the strength of the American manufacturing base, and today unfortunately, last two decades been the heart of the rust belt.
But, we think this new Utica shale discovery on top of the Marcella shale discovery in western Pennsylvania — these can be transformative events. Not only for this area but I think for the country as well. I mean we’re talking about really big numbers here, in the Utica; we could be talking about 25,000 wells being drilled.
Jim: 25,000 wells?
Aubrey McClendon: Sure. That’s over several decades. That will be about a $200 billion investment. So, think about when is the last time anybody showed up — any industry showed up and said I am going to invest $10 billion a year in a state for a couple decades. I think that is about what is going to happen in, in Ohio. And then, what can it mean in the form of oil? I think this could be 25 billion barrels of oil equivalent in the form of oil, natural liquids, and natural gas. Can be one of our biggest discoveries in the US history.
Jim: Now you obviously had measured your words when you said this because, we all know that Eagle Ford is an amazing find. We had Mr. Poppa from EOG on. We had a lot of people who were with Eagle Ford. And Eagle Ford obviously — the multiples are incredible for what property is going for. When you choose the term economically superior to Eagle Ford; what gives you that level of conviction?
Aubrey McClendon: Well, as you mentioned in your lead-up, we’re in every shale plate in the US and, generally, a top one or two position and, Eagle Ford I believe our position’s top three. So, we know what the shale’s are capable of. We discovered the Haynesville, we’ve discovered the Bossier. We’ve now discovered the Utica and, I can’t disclose everything that we know about the plate. But, we have drilled wells in it — 15 wells. We do have production from a series of wells and, we can compare it to all the other discoveries that we’ve made and been a part of in these other shale plates. But, what makes the Utica — I think so special that’ what makes Eagle Ford special as well. Is that you have three phases to the reservoir. You have oil, which is the most valuable product, you have natural gas liquids which is next, and then you have natural gas. And a lot of the shale plates you just have natural gas. So, what makes Utica better than the Eagle Ford I think, is the location of the natural gas — or, will receive a higher price than the Utica natural gas and, I think there’s just more hydrocarbon in place from what we’ve seen to date. And, I think pound for pound, foot for foot the Utica rock is going to be better than the Eagle Ford.
Jim: Alright, Aubrey. One of the things that I am trying to get my arms around is — I remember, I was alive and following things when Crudo Bay was discovered. And, it was just viewed as being the savior for the country. Now on Thursday night you put out this release about Utica, and Utica is even more exciting to me in a lot of ways than Alaska because, I know that there are just people dying for jobs in Ohio. I know what this could mean because, it’s finally the oil is where you need it. You don’t have to spend billions to bring it down from Alaska. And yet, other than, me, did anyone ever say, hey that is a big deal?
Aubrey McClendon: I mean we had some back slapping that came in by e-mails and so forth. But, I agree with you that everybody was focused last week on the debt. It was last week’s dominating news feature. And you know these things take some time to develop. But, I remember three years ago when we announced Haynesville discovery, I said it was going to be the biggest gas discovery in US history. And, here we are today; it’s already become the nation’s largest gas field in just three years.
In time, I then said the Marcellus will pass the Haynesville and, I think the Marcellus will. So, this is a different animal though, and I think that’s what’s so exciting about Utica. If we’re gonna have an oil component to it, and a natural gas liquids component to it. And, I think all three of those things together can work to really start to move us along on this path towards energy independence what we talked about two or three weeks ago.
Jim: Well, I wanted to talk — well, I know you have the value now, if natural gas goes to 5, of $91. You’ve got a $7 billion valuation with the oil service. I know in your report, you’re even talking monetizing Utica already. But, I wanted to ask you about a report that came out of rice, this just, past month. Shale gas in US national security. What has the shale movement done — the transformation of shale in terms of making it so our independence, geopolitically has been rather already enhanced before Washington has even embraced this?
Aubrey McClendon: well think about where we are. The last 40 years of our lives, Jim, OPEC has had a stranglehold on this nation’s economy. And, I think a stranglehold on our foreign policy as well. If you look at the natural resources of the countries and OPEC you really wouldn’t care about them if it wasn’t for the oil. And so what I look at today and say, do we have a plan to get us off OPEC oil and for that matter all foreign oil. And the reality is there hasn’t been one to date. but now using the unconventional reservoirs that we have found, applying hydraulic fracturing, horizontal drilling to the reservoirs we believe we can increase oil and gas production in this country to levels sufficient to back out that oil over the next ten years. You think about what that would do to our national security if we no longer cared so much about really what OPEC was doing. And if American oil production allowed us to say we’re going to develop a foreign policy and develop national defense strategies that weren’t OPEC centric. Instead they were absolutely focused on what the core need and policies of the United States could be. We can get there. And I think we can get there within ten years.
Jim: the one– one last question. In all of the times we’ve talked, I never felt that there has been that much movement in Washington towards natural gas. Using a five dollar number there could be — just because of economic development in the country but, any movement at all towards recognizing that if we do not start using it we’re going to export it. Because, I know you have a plan to export our natural gas too?
Aubrey McClendon: Well, certainly we’re going to support measures that would do that. But, I really don’t think that is our highest and best use of the product. The highest and best use is to use natural gas in our transportation system and not import a barrel of oil. That’s where we are headed. Along the way, I think we will have plenty to export and be able to do that.
Jim: But, is it we’re Aubrey McClendon and Chesapeake or is it we’re the United States?
Aubrey McClendon: Well, I think both. I mean we’re weaving Chesapeake or trying to drive this. We have some friends in the industry that are helping us and other as well. The United States, as a government, should certainly get behind this as well. If you think about we spend $1 million a minute on imported oil. If you think about what that adds up to every year, it’s $400 billion a year. Think about what this economy would be like if Americans could use natural gas in their cars and they paid $2 a gallon rather than $4 a gallon. Think about the economic savings, think about the wealth creation that would occur and again think about the different foreign policy and natural defense strategy.
Jim: The big way out. There’s a lot of small minds down there. This is the big way out of the jam.
Aubrey McClendon: remember that the market always wins at end of the day, Jim.
Jim: You’re right.
Aubrey McClendon: So, I’d love for government to be out in front here. But, the market is moving. The train is pulling out of the station. And I believe government will in this case probably be behind us. But I think they will be with us because, the solutions and benefits of using American natural gas and American oil to get rid of foreign oil, are — the advantages are so obvious. So, I believe they’ll get with us.
Jim: It’s a feel good story; it’s going to make people a lot of money including shareholders of Chesapeake. Aubrey McClendon thank you so much for coming on the show.
Aubrey McClendon: Thank you, Jim.
Jim: Alright. You just heard him. Aubrey McClendon. Chesapeake Energy Chairman and CEO (CHK).
I think its $91 net asset evaluation is spot on. The stock! I mean, come on the stock’s in the 30s. I really think that this may be, of all the stocks that I follow right now, $34. Maybe this one has the most upside. Stay with Chesapeake.