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Chesapeake (CHK) has a new strategy since activist investor Carl Icahn (IEP) wrested control of the company this year - to divest non-core assets, particularly ones with limited cash flow, and to refocus capital on paying down debt and developing core assets. In following with this strategy, Chesapeake recently sold 170,000 net acres, primarily in Kingfisher county, to Gastar Exploration (GST) for what works out to be approximately $500 per acre for prospective acres in the Sooner Trend.

However, similar to the Mississippi Lime deal announced earlier this year, it appears CHK may have left money on the table in the deal with Gastar. In this case, it sold an asset at what may turn out to be a substantially larger discount to its intrinsic value than the Mississippian asset sale, in what appears to be a potentially multi-hundred million dollar oversight.

Two things indicate that Gastar got a great deal. First and easiest to measure, Chesapeake sold just under 6 million shares of Gastar back to Gastar for $1.44 per share. This compares to a current Gastar share price of $2.55 and a recent Gastar share price of over $2.80. Just in the share sale, Chesapeake left over $6 million on the table, or over 1/3 of the value of the shares. And as will be seen below, Gastar's NAV may have increased substantially as a result of the Sooner Trend acquisition, which implies a potentially substantially higher future stock price than the current $2.55 per share.

A recent analyst report estimated a $180 million value for the Sooner Trend acreage net to Gastar. This works out to ~$3/share, implying a GST share price of ~$5.50 if/when the Sooner asset is priced into the stock. This is far above the $1.44 sale price of Chesapeake's ~6 million shares.

The other indication that Chesapeake left substantial money on the table was that it sold 71,000 net acres prospective for the Sooner Trend to Gastar for $500 per acre, or $35 million (net of the value of existing production). This compares unfavorably to the $180 million NAV estimate that the analyst report mentioned above put out on the asset value, as based on those numbers Gastar bought the property for 1/5 of its estimated value. Gastar has internal estimates on its presentation of potentially an even higher value, but being conservative and using that analyst's estimate indicate that Chesapeake may have sold both shares and land to Gastar for a fraction of their value.

To be fair, Chesapeake likely was not aware of the recent well results by Gastar and its private partner in the Sooner Trend. However, an analyst working for the company or advising the company could have flipped through Gastar's investment presentation, seen the results Gastar was highlighting, and connected the dots regarding Gastar's interest in buying such a large land package outside of its previously disclosed core Marcellus asset. This may have required a few hours of work by the right analyst, and seems like something less likely to have been overlooked under Aubrey McClendon's watch, considering the high values he was able to realize in asset sales during his tenure.

This is certainly something activists at Sandridge (SD) and Hess (HES) should keep in mind as they secure control of those companies. Both Sandridge's and Hess's valuations are dependent to a certain extent on the ability to monetize assets at attractive prices, which current management could potentially be experts at. Tom Ward at Sandridge, for example, executed joint ventures and drilling trusts in the Mississippi Lime at far higher valuations than the valuation Chesapeake was able to achieve in its recent Mississippi Lime sale.

Source: Chesapeake Without McClendon: Leaving Money On The Table In Asset Sales