Chesapeake Energy (CHK), America's second-largest natural gas producer, has agreed to sell 50% of its stake in some of its oil and gas assets in the Mississippi Lime shale formation in Oklahoma to China's Sinopec, continuing a series of efforts to monetize its assets and cut debt. Chesapeake will receive around $1.02 billion cash and will make Sinopec its joint venture partner in this play while continuing to operate the properties. Although we believe the deal is a step in the right direction for Chesapeake, the selling price is seen as being too low. The stock fell by around 7% in Monday's trading following the news.
Selling Price a Fraction of Previous Estimates as Firm Lacks Bargaining Power
The Mississippi Lime stake had been on the block for almost a year. Given low natural gas prices and its dire need for cash, Chesapeake hasn't had too much bargaining power in its asset sales. The average price for the stake works out to around $2,400 per acre, well below the $7,000+ per acre that Chesapeake had valued it at earlier last year. The situation was quite similar when the firm sold its Permian basin acreage a few months ago -- it ended up getting a price that was about 40% lower than expected (see: "Chesapeake Sells Permian Assets -- At A Lower Price Than Hoped," Forbes).
Divested Assets Are Liquid Rich
It is interesting to note that most of these assets sold are liquids rich, which means that they contain a significant amount of oil or natural gas liquids. Chesapeake has been focusing on drilling for more liquids of late since liquids have had relatively stable prices and enhanced profitability. The production from the Mississippi Lime assets, prior to the sale, averaged approximately 34,000 barrels of oil equivalent per day during Q4 2012. The entire field contains approximately 140 million barrels of oil equivalent (mboe) in proved reserves, meaning that Sinopec's share would be around 70 mboe.
To put this into perspective, Chesapeake as a whole holds around 2.6 billion boe in total proven reserves, implying that the firm would be giving up just under 3% of its proved reserves. We do not expect the sale to have a very significant impact on the firm's future production.
Chesapeake's Asset Monetization Plans for 2013
Chesapeake embarked on an asset monetization spree closing asset sales of nearly $12 billion in 2012. This has enabled it to reduce its long-term debt from around $15.7 billion in Q3 2012 to around $12.1 billion currently. Given the fact that its cash flow situation remains poor, the firm expects to divest a total of $4 billion to $7 billion in non-core assets this year. The firm is also scaling back on its capital expenditure plans setting aside just about $6 billion toward its drilling budget for the year, down from around $8.8 billion last year.
Disclosure: No positions.