Chesapeake Energy - Company Manages To Finalize A Significant Sale Before Year End

| About: Chesapeake Energy (CHK)

Shares of Chesapeake Energy (CHK) trade with gains of 1.5% in after hours trading. The troubled natural gas exploration and production company announced to sell a majority of its midstream assets to Access Midstream Partners LP (ACMP) for $2.16 billion.

The Deal

Chesapeake Energy announced that it has entered into a definitive agreement to sell some key midstream assets located in Marcellus, Utica, Eagle Ford, Haynesville and Niobrara.

The cash-strapped energy company will receive approximately $2.16 billion for the assets. The deal includes new market-based gathering and processing agreements, and is expected to close by the end of this year.

Chesapeake furthermore completed the sale of other midstream assets in Oklahoma and Texas for another $175 million.

In total midstream asset sales completed since the second quarter of this year will generate an expected $4.875 billion in total proceeds.

CEO Aubrey K. McClendon commented on the deal, "We are pleased to announce further progress towards our assets sale goals for 2012-13. We look forward to completing additional asset sales and achieving our goals of strengthening our balance sheet, tightening our asset focus and increasing returns to shareholders."


Chesapeake ended its third quarter with merely $142 million in cash and equivalents. The company operates with some $16.1 billion in short and long term debt, for a net debt position of some $16 billion.

In the first nine months of the year, Chesapeake generated revenues of $8.8 billion. The company reported a loss of $938 million after taking a $3.3 billion impairment charge.

Factoring in modest gains in after hours trading, the market values the firm at roughly $11.5 billion. This values the firm at roughly 0.9 times annual revenues. As a result of the impairment charges, the company is on track to report a full year loss.

At the moment, Chesapeake pays a quarterly dividend of $0.09 per share, for an annual dividend yield of 2.0%

Some Historical Perspective

Year to date, shares of Chesapeake have fallen some 23%. Shares started the year around $22 per share and quickly rose to highs of $26 in April. Worries about the debt position, record low natural gas prices, and a possible resignation of CEO McClendon send shares to lows of $13 in May. Shares recovered to levels in the low twenties, but fell back and are currently exchanging hands at $17 per share.

Back in 2008, when the shale boom was taking place in North America, shares set all time highs around $67 per share. Lower demand for gas as a result of the recession and record supply resulted in historically low natural gas prices. Shares fell to lows of $11 later in 2008, to recover to levels around $35 in 2011. From that point in time, shares have fallen back some 50%. Revenues stagnated in recent years and lower valuations of assets resulted in multi-billion charges impacting the bottom line.

Investment Thesis

Investors are happy with the much anticipated asset sales so late in this calendar year. The sale to Access Midstream Partners will generate over $2 billion in proceeds, allowing Chesapeake to cut its net debt position by some 10 to 15%.

Natural gas prices rallied in recent months as producers closed some wells and the winter was approaching. Prices fell back a bit in recent weeks as a warm start of the season resulted in a surprise jump in inventories. Despite the warm weather, natural gas prices trade at similar levels as last year.

In November of this year, investors were disappointed by the delay in asset sales. At the time, the company delayed assets sales from the fourth quarter into 2013. The company did manage to squeeze this sizable sale before Christmas, thereby positively surprising investors.

Originally the company hoped to sell up to $19 billion in assets until the end of 2013. During the past quarters, the company has sold up to $5 billion in assets, giving the company some more breathing air. Operating cash flows are rapidly improving due to increased production levels, recovering natural gas prices, and lower capital expenditures.

The current valuation of Chesapeake remains attractive and attracts some of the world's largest investors. Corporate investor Carl Icahn has already taken a large stake in the company at similar price levels.

Furthermore many commentators point out that large oil and gas companies might make a move for the company. Many integrated majors are struggling to grow operations, and by acquiring Chesapeake they could secure reserves and boost their growth profile. Despite the assets sales, the company is still the largest holder of US acres, on which it has plenty of room to drill for natural gas and liquids.

An investment in Chesapeake does not come without risk. However the long term risk-reward ratio's look good. Opportunistic investors could pick up some shares at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.