Chesapeake Prices IPO For Assets

| About: Chesapeake Granite (CHKR)

Chesapeake Energy Corporation (NYSE:CHK) announced the initial public offering (IPO) of its oil and gas assets in western Oklahoma at $19.00 per common unit. The company plans to sell 20 million units. Approved by the New York Stock Exchange, the shares will trade under the symbol of (NYSE:CHKR).

Chesapeake manages its properties at the Colony Granite Wash play in Washita County in the Anadarko Basin through the Chesapeake Granite Wash Trust. Earlier this month, the Trust was expected to offer 23.4 million units for $19 to $21 each.

Formed in June, the Trust entitles Chesapeake to receive a percentage of the proceeds from hydrocarbons being produced in the basin’s existing 69 wells and the 118 development wells to be drilled in future. Around closing time of the IPO, Chesapeake will convey a 90% royalty interest in the producing wells and a 50% royalty interest in its development wells.

In return for the royalty interests, Chesapeake will obtain all proceeds from the offering, which it intends to utilize for debt repayment as well as capital expenditures for exploration activities, along with other corporate purposes.

The units sold represent an approximate 43% beneficial interest in the Trust that will also permit the underwriters an option to buy up to 3 million additional common units.

Chesapeakeis an independent oil and gas company engaged in the acquisition, development, and production of onshore U.S. natural gas resources. The Oklahoma-based company also plans to make an IPO for its oilfield services subsidiary including drilling rigs, trucks, and hydraulic fracturing equipment.

We believe that Chesapeake’s focus on shale gas plays provides an impetus to monetize these assets more effectively and efficiently, thereby boosting returns. Given its industry leading growth profile, competitive cost structure and management’s track record of outperformance, Chesapeake is advantageously placed in the industry.

However, Chesapeake’s highly gas-weighted reserves/production profile and exposure to the inherently cyclical and volatile oil and gas fundamentals remain key areas of our concern. The company also faces stiff competition from players such as Anadarko Petroleum Corporation (NYSE:APC) and BP plc (NYSE:BP).

Hence, we see the company as performing at per with the broader market and maintain a Neutral rating for a longer term, supported by the Zacks #3 Rank (short-term Hold recommendation).