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Chesapeake Energy Corporation (CHK) is an independent energy company involved in the exploration and production of natural gas and oil, with operations in the United States.

Mentioned below are few of the reports that we have already done on CHK.

  1. Is Chesapeake Energy A Turnaround Story?
  2. Why We Agree With Icahn On Chesapeake Energy
  3. Chesapeake Earnings Review: Stock Seems Geared Up For Turnaround

We highlighted our positive stance on the stock due to the expected rebound in natural gas prices, after they reached their 10-year lows in April 2012. However, as announced by the company in its financial statements, CHK wants to shift its production from gas to oil-and-liquid plays.

Hence, the company has to undergo major capital expenditures of about $14.7 billion in 2012. These capital expenditures are expected to be funded through the sale of company assets.

The purpose of this report is to discuss the progress made on the sale of the company's assets up till now, and expectations of similar sales in the near term. These asset sales will determine the fate of CHK's stock price.

Asset Sales for 1H2012

CHK completed the sale of assets worth $4.7 billion during the first half of 2012. The sale included:

  • The sale of 10-year volumetric production payment (VPP) for $745 million for assets producing hydrocarbons in the Anadarko Basin Granite Wash play.
  • Preferred shares of its subsidiary, CHK Cleveland Tonkawa, L.L.C., and a royalty interest in the Tonkawa and Cleveland plays worth $1.25 billion.
  • The sale of general partner and common interests in Access Midstream Partners (ACMP) to Global Infrastructure Partners (GIP) for $2 billion.
  • Sale of natural gas and oil properties in the Texoma Woodford play for about $575 million.
  • The sale of other miscellaneous assets for about $100 million.

Expected Sales during 3Q2012

CHK announced in its 2Q2012 results that it expects to sell three Permian Basin assets. As per the company's announcement, it has signed a Purchase and Sales Agreement (PSA) for properties in the Midland Basin area of the Permian Basin, with affiliates of EnerVest Ltd.

CHK has received and accepted bids for two more assets in the Delaware Basin of the Permian Basin. The company is currently under the process of negotiating PSAs for the Delaware Basin assets, and is expecting to enter a PSA in the next few weeks and complete the transaction in the third quarter of 2012.

CHK is currently negotiating with GIP for the sale of most of its remaining midstream assets. The company expects to close the sale of various other assets during the quarter, and is expecting $7 billion in asset sales for the third quarter of 2012.

Expected Asset Sales for Year

As mentioned above, CHK expects to receive $7 billion in the third quarter of 2012 through the divesture of assets. Theses divestures would take the total proceeds from assets sales to $11.7 billion by the end of the third quarter of 2012.

CHK had previously discussed a range of $11.5-$14 billion to be raised through divestures. However, the company revised its range to $13-$14 billion in its earnings announcement for 2Q2012.

If the company is successful in the divestures announced for the second half of 2012, it will reduce its term loans of $4 billion and achieve the 25% two-year debt reduction goal, as well as be able to meet its capital expenditure target for the year.

Earnings Review

CHK announced its second quarter earnings on August 6, 2012; reporting revenues of $3.4 billion in the second quarter of 2012, showing an increase of 3% compared to the same period last year, and beating consensus revenue estimates by 38.8% for the reported quarter.

CHK reported adjusted EPS of $0.06 for 2Q2012, indicating a decline of 92% compared to adjusted EPS of $0.76 for the same period last year. The adjusted reported EPS for 2Q2012 missed consensus estimates by 14.8%.

The reported revenue was higher than what was estimated due to the increase in production, which offset the decline in natural gas prices. However, the prices of natural gas liquids were a drag on CHK's profitability.

Outlook

We maintain a positive stance on the company due to the potential rebound in natural gas prices going forward, and high expectations of the company completing its asset sales to meet its funding gap due to the high capital expenditures and a reduction in the term debt.

CHK is trading at higher P/E and EV/EBITDA multiples of 15x and 5.3x as compared to some of its peers. However, it is trading at the lowest P/B and P/S multiples of 0.9x and 1x, and is offering the highest dividend yield of 1.8% amongst its peers mentioned below.

Name

P/E

EV/EBITDA

Dividend Yield

ROE

P/B

P/S

Chesapeake Energy Corp

15x

5.3x

1.8%

13.9%

0.9x

1x

Anadarko Petroleum Corp (APC)

16.2x

5.9x

0.5%

-5.8%

1.7x

2.6x

Apache Corp (APA)

8x

3.5x

0.8%

11.7%

1.2x

2.1x

Devon Energy Corp (DVN)

12.4x

4.3x

1.3%

11.2%

1.1x

2.6x

Source: Analyzing Chesapeake's Asset Sales