Friday, May 21, 2010

Chesapeake Keeps Looking East for Dough

The Financial Times reported yesterday that Chesapeake Energy has expanded its follow-on offering of preferred stock to Asian investors from $500 million to $900 million.  As part of this new round, the sovereign wealth funds of China (China Investment Corp. - CIC), South Korea (Korea Investment Corp. - KIC) and Singapore (Temasek) will join Chinese investor Hopu Investment Management and a Japanese industrial company in taking down the $900 million round of equity.  CIC and KIC will each invest $300 million with the remaining $300 million going to Temasek, Hopu and the Japanese company. Earlier in the month Temasek and Hopu took down $600 million of preferred stock.  The PIPE security to be issued in this round is similar to the equity issued earlier this month:  convertible preferred stock paying 5.75%.

By my count, this will bring to $2.6 billion the new preferred equity going into Chesapeake.  I count $1.5 billion from Asian investors and $1.1 billion from North American institutional investors.  I'm too lazy to do the dilution analysis, but based on media reports, it looks like the $2.6 billion would convert to around 15% to 20% of the company when converted.

As the FT article points out, the Asian investment represents a bullish bet on natural gas.  The investors see gas at the bottom of the cycle, and they see increased demand for the fuel as its environmental benefits relative to coal and oil continue to be recognized.  These funds increasingly are looking towards commodities as investments, having been stung in other sectors.  I have the feeling they will be eager buyers of other securities from the U.S. gas industry.

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