Important Note: This article is not an investment recommendation and should not be relied upon when making investment decisions - investors should conduct their own comprehensive research. Please read the disclaimer at the end of this article.
At estimated $5,000-7,000 per undeveloped acre, the price received by Chesapeake Energy (NYSE:CHK) for its second asset package in the Haynesville area comes at the low-end of my estimated range of $5,000-10,000 per acre. The price is respectable nonetheless and I view the outcome as a positive, albeit tactical, development for the stock. The Lower Cotton Valley natural gas potential of the acreage appeared to be mostly exploratory and was unlikely to be the company's operational priority for the foreseeable future. While the alternative could be to wait for other operators in the area to delineate the opportunity set, carrying "idle" acreage was an expensive and uncertain proposition, given Chesapeake's high cost of capital.
The sale includes ~41,500 net acres and 326 operated and non-operated wells currently producing approximately 50 MMcf/d of natural gas, net to Chesapeake. No information with regard to the associated proved reserves or PV-10 value was provided. The press release stated, however, that in the two Haynesville transactions the company is divesting ~80 MMcf/d of gas production and approximately $50 million of estimated 2017 operating income.
Attributing ~$250-300 million to what appears to be mostly mature, low- or moderate-decline dry gas production, the implied value of the exploration and development potential associated with the acreage is in the $165-215 million range. Assuming that the primary value is associated with the Lower Cotton Valley potential and assuming that 75% of the acreage is either prospective for the LCV play or has economic development potential in the Haynesville/Bossier Shales (the acreage is mostly outside Haynesville Core), the implied price per undeveloped acre comes out at ~$5,000-7,000 per acre.
The two Haynesville packages bring in $915 million in gross proceeds, which compares to my rough estimate of ~$1 billion at the time of the announcement six months ago of the intended divestiture process. While the combined sale of ~80 MMcf/d of moderate-decline production is likely to impact the borrowing base (or may have been already included in the recent amendment to the senior credit facility), the transaction is clearly accretive to the company's credit metrics. The initiative also appears to be well timed, given the positive momentum in natural gas fundamentals.
The winning bidder in Chesapeake's second Haynesville area sale is an affiliate of Covey Park Energy LLC, a privately held E&P company formed in June 2013 with approximately $300 million of financial sponsorship from Denham Capital, an energy and resources private equity firm. Covey Park is primarily focused on the acquisition and exploitation of long-life reserves in the Ark-La-Tex, Permian, and MidContinent regions, with the objective of adding value to acquisitions through low-risk development and optimized operations.
This is a second major recent acquisition by Covey Park in Northern Louisiana. In November of this year, Covey Park acquired assets that were located primarily in Panola, Nacogdoches and San Augustine counties in Texas, and DeSoto, Bossier, and Sabine Parishes in Louisiana, and consisted of approximately 90,000 net acres with average net production of 35 MMcf/day. The November acquisition brought Covey Park's leasehold ownership in Texas and Louisiana to over ~200,000 net acres, with daily net production of ~325 MMcf/d expected for 4Q 2016, and total proved reserves in excess of 2.5 Tcf.
Impact On The Balance Sheet
As I have argued in my previous posts, Chesapeake will have to continue its effort of divesting small and large undeveloped acreage packages and mature production.
Despite numerous divestitures to date, the company's asset portfolio remains asset-rich relative to its enterprise value. The de-leveraging route via partial sales in core areas appears viable, even though the price to be paid is a significantly reduced asset footprint at the end.
The Tender Offer Undersubscribed
Chesapeake also reported the results to date of its pending cash tender offers. As a reminder, Chesapeake had offered to purchase up to $1.2 billion aggregate purchase price of its outstanding notes. A total of ~$1.1 billion of principal amount across various maturities were tendered before the Early Tender Date, with the deadline for holders to validly withdraw tenders of Notes now passed. Chesapeake expects to settle the tender offers for all accepted Notes on or about December 21, 2016.
Despite generous (in my view) premiums offered by Chesapeake for its near-term maturities, the tender offer in the priority 1 category was visibly undersubscribed, although the level of participation was healthy. The undersubscribed offer indicates that debt investors feel quite comfortable with regard to Chesapeake's credit and are prepared to carry the risk despite the relatively low effective yields reflected in the tender prices.
While this is a clear indication of a perceived positive credit momentum, Chesapeake still has a lot of work to do before the balance sheet comes in proper shape. Assuming $2.3 billion in EBITDA in 2017 and applying the 2.0x leverage ratio indicated by the company as its ultimate target, the "comfortable" level of debt in 2017 would be in the $4.6 billion range, which requires an additional $3+ billion reduction in debt.
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Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.
Disclosure: I/we 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.