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Chesapeake Energy Corp ( CHK - Analyst Report ) has teamed up with an investment firm, Kohlberg Kravis Roberts & Co. ( KKR - Snapshot Report ) to invest in mineral and royalty interests in important U.S. oil and gas basins.
Per the deal, both parties are entitled to a combined $250 million of initial investment to get hold of mineral rights and royalty interests in the U.S. drilling fields, mainly with exposure to shale and other unconventional energy sources. Of the initial investment, KKR will contribute 90% of the capital for the partnership, while Chesapeake will contribute 10% and will be assigned finding, acquiring and managing royalty interests.
This latest partnership emphasizes Chesapeake's endeavor to expand its mark in the U.S. Of late, the second-largest natural gas producer in the U.S. behind Exxon Mobil Corporation ( XOM - Analyst Report ) , – Chesapeake – is also trying to fill the funding gap for its 2012 expenditure that resulted from low natural gas prices, through divestitures. The company plans to raise as much as $10 billion to $12 billion from asset sales and joint ventures to cope with the mounting debt level and sinking gas prices.
Oil price climbed at an average 13% rate in January and February 2012 on an annualized basis, however, gas prices plummeted to a 10-year low of $2.231 per million British thermal units on January 23, 2012.
Again, recent technological development in the unconventional oil and gas sector has paved the way for lucrative investment opportunities for exploration and production of domestic oil and gas. Hence, the new techniques also allow Chesapeake to hit vast areas of underground shale oil and gas.
We believe Chesapeake is one of the most active players in the industry to manage its asset portfolio through a combination of acquisitions and disposals.
However, since natural gas accounted for about 82% of Chesapeake’s production in the fourth quarter of 2011 and as near-term speculations of challenging natural gas fundamentals remain, we are apprehensive that the company’s results will be vulnerable to fluctuations in the relevant markets. Hence, we believe that the stock will perform in line with the group and maintain our long-term Neutral recommendation.
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