Chesapeake targets new asset, debt sales

Mon Feb 13, 2012 12:35pm EST

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(Reuters) - Chesapeake Energy Corp (CHK.N) said it will sell $10 billion to $12 billion in assets as decade-low natural gas prices force the company to raise cash to cover a shortfall.

The second-largest U.S. natural gas producer has a strategy to increase output from more profitable wells that produce crude oil and natural gas that is rich in liquid content.

Despite those efforts, the Oklahoma City, Oklahoma, company faces a funding gap in the billions for next year and it needed to cobble together a series of deals to raise cash.

Chesapeake said it expects the sales or joint ventures for its West Texas Permian Basin assets and Mississippi Lime acreage in northern Oklahoma to yield $6 billion to $8 billion this year. The company expects those deals to close by the end of the third quarter.

It also plans to raise $2 billion by selling a "volumetric production payment," in which it receives funds for oil and gas it has not yet produced, from its Granite Wash assets in the Texas Panhandle and from another the sale of preferred shares centered on acreage in two counties in Oklahoma.

For example, Chesapeake is selling four field pipeline networks in west Texas as well as natural gas production and reserves in the Barnett and Woodford shales along with 37,800 acres in Texas Wolfbone field on the border with New Mexico, according to a prospectus on the deals.

Investors initially welcomed the announcement. Shares of Chesapeake rose more than 5 percent in early trading, before falling back somewhat.

Chesapeake may find it difficult to get the prices it wants for the assets because of low prices for natural gas, which are hovering near $2.50 per million British thermal units, Brean Murray, Carret & Coone analyst Raymond Deacon said.

The low natural gas prices are also putting pressure on the company's cash flow.

Analysts have said anticipated cash flows of about $5 billion in 2012 are likely to fall far short of Chesapeake's spending needs of around $12 billion.

Chesapeake shares had slumped nearly 40 percent since their peak in August through last week, hurt by the weak gas prices. The company has promised to trim its debt to $9.5 billion by the end of the year from nearly $14.5 billion at the end of the third quarter.

Last week, Chesapeake said it had cut its gas output by 500 million cubic feet per day and was considering pulling production down by double that amount, a move that could help reduce spending.

Included in the expected deals are sales or joint ventures for the company's West Texas Permian Basin assets and Mississippi Lime acreage in northern Oklahoma, which will yield $6 billion to $8 billion.

Chesapeake's plans to raise funds with a volumetric production payment from its Granite Wash assets in the Texas Panhandle and from another sale of preferred shares centered on acreage in two counties in Oklahoma raised some concerns.

Volumetric production payments are viewed as debt by some analysts and ratings agencies, and preferred shares are sometimes viewed as expensive debt because the company is obligated to pay a dividend.

"In short, we believe today's announced plans correspond to adding $3 billion in debt - $1 billion of on-balance sheet debt (senior notes) along with $2 billion of off-balance sheet liabilities (VPP and LLC structures), Bernstein Research analyst Bob Brackett said in a note to clients.

We believe many things need to go right for the company to achieve the proposed $10 billion-$12 billion in asset monetizations, and note the company is largely selling liquid assets to pay for its current cash-flow shortfalls, the analyst said.

The Permian Basin in Texas, which Chesapeake may sell, is experiencing a rebirth of sorts as operators use hydraulic fracturing and horizontal drilling to pry oil and natural gas liquids from rocks.

The company expects the sale of some "midstream" pipeline and storage assets, service company operations and other investments to bring in another $2 billion.

It will also issue $1 billion in bonds with a maturity in 2019 to help cover short-term debt obligations and for general corporate purposes.

Chesapeake shares were up almost 2 percent at $22.54 in midday trading on the New York Stock Exchange after rising as high as $23.32 earlier in the session.

(Reporting by Matt Daily in New York and Swetha Gopinath in Bangalore; Editing by Maureen Bavdek, Lisa Von Ahn and Gunna Dickson)

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