Chesapeake Energy Corp. (NYSE:CHK) filed three documents with the SEC on Friday. One replaces a shelf registration that expires on December 5, the second authorizes the issuance of up to 50 million shares of Chesapeake stock "in connection with the acquisition of assets, businesses or securities of other companies," and the third extends an agreement with three of its sales agents to sell up to $1 billion in shares in 2009 and beyond. Chesapeake shares dived more than 15% on the news.  The first and third of these filings are pretty normal. The second,however, leaps off the page.

Chesapeake wants the ability to sellanother 50 million shares? That’s a dilution of a bit more than 8% oncommon shares outstanding at the end of the third quarter of 2008. Justthe idea that Chesapeake might need that sent shivers of doubt up manyspines.

After all, the company has been raising truckloads of cash by sellingassets. Since March, BP plc (NYSE:BP), StatoilHydro (NYSE:STO), andPlains Exploration (NYSE:PXP) have together kicked in about $6 billionin cash for pieces of Chesapeake. Othertransactions have yielded another $4 billion. How much cash does thecompany need?

The answer is, "A lot." Chesapeake states the problem succinctly in itsthird quarter 10-Q: "We anticipate that our remaining 2008 and 2009budgeted exploration and development capital expenditures, togetherwith other capital expenditure requirements, will exceed our cash flowfrom operations and our borrowing capacity under our revolving creditfacilities."

The company used the cash from asset sales to repay its outstandingdebt. Then, of course, it re-borrowed the money. Chesapeake has alsoissued more than 50 million shares of common stock this year and twodebt offerings totaling more than $4.7 billion.

In it’s third quarter 10-Q filing, Chesapeake noted that it wasreducing capital spending for the fourth quarter of 2008 to $2.4-$2.8billion and planned spending for 2009 would drop to the range of$7.0-$8.3 billion. That is still a lot of money, but the first thing togo would almost certainly have been additional acquisitions. That wouldmean no or very little growth. Thus, the filing to issue new stock tofund acquisitions.

The market remains unhappy with Chesapeake this morning. The shareprice is off more than 7%, to under $16. The 52-week trading range is$11.99-$74.00.

Paul Ausick
December 1, 2008

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