Chesapeake gets breathing room with $6.9 billion asset sale

Wed Sep 12, 2012 5:21pm EDT

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, April 17, 2012. REUTERS/Steve Sisney

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, April 17, 2012.

Credit: Reuters/Steve Sisney

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(Reuters) - Chesapeake Energy Corp's $6.9 billion deal to sell gas fields and pipelines should help stabilize the troubled company for the rest of the year and give it time to figure out how it will fund 2013 operations.

With agreements to sell most of its assets in the Permian Basin to Royal Dutch Shell Plc and Chevron Corp, as well as nearly all of its remaining infrastructure network, Chesapeake will now have to rely more heavily on a smaller number of assets to grow.

Chief Executive Aubrey McClendon built Chesapeake into the second-largest natural gas producer in the United States through aggressive land purchases and development of so-called unconventional resources around the country. But the company has been struggling recently due to slumping natural gas prices, as well as controversial land deals in Michigan and personal loans taken out by McClendon.

Chesapeake has been selling assets this year to meet an estimated $10 billion funding gap. It plans to use some of the proceeds from Wednesday's announcement to trim its $14.33 billion debt load by $4 billion. The company's market value is roughly $13.27 billion.

The deals keep the company afloat for 2012. Still, they do not significantly close the gap between the amount Chesapeake needs to spend in the future to maintain its current growth and its projected revenue.

Chesapeake will need to fill a funding gap of at least $4 billion in 2013, Barclays analysts estimate.

"They are fine from a funding point of view for 2012," said Morningstar analyst Mark Hanson, who estimates the company will finish the year with a surplus.

He estimated that based on the company's current growth plan, "they are in the hole already for 2013 ... They probably need to sell a not insignificant amount of assets in 2013 to plug that gap."

The company sold its pipeline network for more than analysts had expected, but got less for its Permian assets than expected, Argus Research analyst Phil Weiss said.

"When you look at the acquirers - Chevron and Shell - I certainly wouldn't expect them to overpay," Weiss said.

The company holds 1.5 million acres in the Permian Basin, a vast source of oil and natural gas in the western part of Texas and southeastern New Mexico.

"There's no way at this point in time to know what these reserves are really worth," said David Dreman, chairman of Dreman Value Management, which owns about 1 million shares of Chesapeake. "It doesn't look like this was a buyers war."

Chesapeake's Permian sales work out to about $3,200 per acre, less than half the $7,500-an-acre average that sellers in the Permian had reaped in 10 previous sales during 2011 and 2012, said Morningstar analyst Mark Hanson.

Given the quality of Chesapeake's assets in the Permian, though, Hanson had expected a price of around $3,750 an acre.

Chesapeake's shares fell 1 percent to at $19.89 on Wednesday. The stock has dipped 10.8 percent so far this year.

The deal is part of the company's strategy to shift away from cheap natural gas into more lucrative crude oil. It also comes after a Reuters report in June showed Chesapeake and Encana Corp had colluded in 2010 to avoid bidding against each other in Michigan land deals.

That report has led to an investigation by the U.S. Department of Justice into possible criminal antitrust violations.

'SIGNIFICANT STEPS'

Chesapeake's chief executive, Aubrey McClendon, said the company had reached about 85 percent of its goal to sell $13 billion to $14 billion of assets this year.

"These transactions are significant steps in the transformation of our company's asset base to a more balanced portfolio among oil, natural gas liquids and natural gas resources and production," McClendon said in a statement.

Chesapeake has been working to sell assets in the Permian Basin since February. Depressed natural gas prices have crimped cash flow at Chesapeake and many other energy companies, leaving asset sales as a good way to raise cash.

Chesapeake is selling about 618,000 acres in the southern Delaware Basin portion of the Permian Basin to Shell, which said it is paying $1.94 billion.

Another 264,000 acres in the Permian is being sold to Chevron. Terms of that deal were not disclosed

Chesapeake is keeping 470,000 acres in the Permian.

In total, Chesapeake is raising about $3.3 billion from the sale of Permian Basin assets.

Chesapeake said in May that more than 10 companies had looked at the Permian acreage. Investment bankers said some potential buyers had blanched at the assets because of concerns about levels of natural gas liquids in the package as well as the need for an aggressive drilling program to hold on to some of the land.

Also Wednesday, Chesapeake said it would raise $3 billion from selling nearly all of its remaining pipeline and related assets in several transactions.

The company previously announced the largest of the transactions - a $2.7 billion deal pending with Global Infrastructure Partners - when it signed a letter agreement with the infrastructure company in June. [ID:nL4E8H88RP] It said then that the deal would bring in more than $2 billion.

The company is also selling some land in Ohio's Utica shale formation for some $600 million in four separate deals. After the deals close, Chesapeake will have about 1.3 million acres left in the Utica.

MISSISSIPPI LIME

Chesapeake is still looking for a joint venture partner for its holdings in the Mississippi Lime in Oklahoma and Kansas. It said earlier this year that its total holdings there could be worth $14 billion to $16 billion, based on an assumption of $7,000 to $8,000 an acre.

Joint ventures have been quite popular with foreign companies looking to gain a foothold in and expertise with North American shale plays.

But one investment banker said that there is currently "a little bit of 'JV fatigue,'" in the energy industry, noting that some companies might be wary of linking up with the precariously positioned Chesapeake.

"I think that's very true as it relates to Chesapeake, which has a bit of an asterisk beside their name at this point. I think people have found their experience with Chesapeake has been unrewarding," said the banker, who spoke on the condition of anonymity due to lack of approval to speak on the record..

Reuters reported earlier this year that McClendon has taken $1.1 billion in personal loans against his stakes in Chesapeake wells during the past three years.

The loans, which came mostly from an investment management company that also did business with Chesapeake, had not been disclosed to shareholders. The Securities and Exchange Commission and the Internal Revenue Service have launched inquiries.

(Reporting by Ernest Scheyder and Michael Erman in New York and Swetha Gopinath in Bangalore; Editing by Sofina Mirza-Reid, Bernadette Baum, Maureen Bavdek and Phil Berlowitz)

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