Chesapeake Energy: Forced into fire sales?

Chesapeake Energy must rapidly sell assets to keep itself afloat.

NEW YORK (CNNMoney) -- Can Chesapeake Energy's chief executive pull yet another rabbit out of his hat?

To plug what's been estimated as a $9.2 billion gap between Chesapeake Energy's (CHK, Fortune 500) 2012 capital expenditures and its cash flow, CEO Aubrey McClendon needs to sell assets fast.

Record low natural gas prices have the potential to bankrupt a highly indebted company that was built on $4 natural gas. As natural gas prices hit 10-year lows in recent months, that's put Chesapeake on thin ice.

McClendon has said that Chesapeake plans to sell up to $17 billion in assets by the end of 2013 to fill that gap, but analysts and M&A advisors question whether Chesapeake's assets are worth as much as McClendon claims.

While Chesapeake has valuable assets, it's unlikely to be a takeover target because it also has a heavy debt burden of roughly $10 billion, say analysts.

McClendon and Chesapeake came under fire this week after Reuters reported that McClendon took roughly $1.1 billion in personal loans against his stake in Chesapeake wells.

The disclosures have raised calls for the resignation of McClendon and other board members, and sparked a host of shareholder lawsuits.

"We believe the best thing for investors would be to replace the board and/or CEO," Phil Weiss, an analyst at Argus Research, wrote in a research note. Weiss cited not only McClendon's personal loans as reasons for shareholders to push him out, but Chesapeake's "use of financial engineering" and "the relatively low quality of its financial data."

For weeks, several large hedge funds have been building positions in Chesapeake's bonds, while simultaneously taking short positions in the company's stock, according to several traders.

After news of McClendon's loans broke, shares of Chesapeake dropped roughly 10%. The company's stock has fallen 19.2% since the start of the year.

Chesapeake declined to comment for this story, instead referring to a recent Bank of America research report that said Chesapeake doesn't have "balance sheet stress."

"The 2012 plan is almost entirely discretionary," wrote BofA anlaysts. "No one is forcing management to spend $12 billion in capital."

Yet Argus' Weiss noted that there's only so much that Chesapeake can cut because they could lose leases on production sites if they don't make investments in them.

"Since 2001, their capital expenditures have always exceeded their cash flows," said Weiss.

McClendon has built a track record on buying oil and gas wells and selling them for a profit. The company recently sold assets for $2.6 billion to three groups of buyers.

"That's what they're good at, buying stuff and selling it at a higher price," said Subash Chandra, an oil and gas analyst at Jefferies Group.

Chandra said that there's a wealth of potential buyers both domestic and foreign for nearly all of Chesapeake's assets.

Jefferies' vice chairman, Ralph Eads, who was also McClendon's college roommate at Duke University has been Chesapeake's advisor on nearly every transaction. Jefferies declined to comment about Chesapeake's potential asset sales.

This week, the company started an auction process for its holdings in the Permian Basin, an oil field in Texas and New Mexico, and hopes to wrap it up in the third quarter.

Still, it may be tough to find a buyer willing to pay a high price since the bidder would be forced to develop and operate oil or gas plants, said one investment banker who declined to be named because he may be working on the deal.

He said many of Chesapeake's wells in the Permian Basin hold more gas than oil, which could pose a potential catch-22 for Chesapeake because the holdings are technically considered an oil basin.

Argus' Weiss said that U.S. law prohibits producers from exporting domestically produced oil, which would diminish the prospects of a foreign buyer.

Foreign companies have been the dominant buyers for Chesapeake's assets. Last year, Australian mining firm BHP Billiton (BHP) bought gas assets for $4.75 billion, and prior to that, China's state oil company CNOOC (CEO) spent $1.1 billion for shale assets in Texas that it operates as a joint venture with Chesapeake.

Overall, investors remain a bit befuddled by how Chesapeake accounts for interest expenses and where profits come from.

"They're spending a lot of money and the money they're making seems to be coming from raising more money," said Daniel Yu, a private investor who has been studying the company but does own any shares or short positions on Chesapeake.

Like many of its competitors, Chesapeake must wrestle with a new world of $2 and under natural gas prices. "If gas stays at $2, there's not a single company out there that's prepared for it," said Chandra.