Chesapeake Continues to Divest

Natural gas giant Chesapeake Energy Corporation ( CHK - Analyst Report ) has inked a deal to sell certain assets in western Oklahoma, as it tries to narrow cash-flow shortfall while shifting gears to oil-directed drilling from natural gas.

Oklahoma City-based Chesapeake said it plans to divest more than 28,000 net acres in the West Turkey Creek Granite Wash and Hogshooter Wash areas. The to-be sold assets comprise 117 wells that generate $3.2 million a month in net operating cash flow.

The acreage comprising 113 producing wells delivered 765 barrels of oil, 684 barrels of natural gas liquids and 9,935 thousand cubic feet of natural gas a day over the past year.

The company insisted that these properties are not considered as core to the company and the sale does not include the Hogshooter oil find, which the company regarded as an important one.

Earlier this year, Chesapeake made a major new discovery in the Hogshooter play in the Anadarko Basin of the Texas Panhandle and western Oklahoma. The company holds net acreage of about 30,000 in the Hogshooter play, of which over 90% is held by production from its legacy Granite Wash formation.

Chesapeake remains focused on its asset monetization initiatives as the company is trying hard to minimize capital expenditure and devolve as much as $14.0 billion worth of assets this year and an additional $4 billion to $5 billion in 2013. The company has been in the news in recent times as it is under pressure to fund its capital budget amid diminishing cash flows given the cascading natural gas prices.

The company entered into a series of transactions in September this year to sell a major portion of its properties and infrastructure in west Texas for a total consideration of $6.9 billion. Chesapeake inked deals worth $3.3 billion, with the affiliates of Royal Dutch Shell Plc ( RDS.B - Snapshot Report ) , Chevron Corp. ( CVX - Analyst Report ) , and Houston-based EnerVest, Ltd. to divest the southern Delaware Basin section, northern Delaware Basin portion and Midland Basin portion of the Permian Basin, respectively.

Given the gas price scenario, Chesapeake intends to deploy more funds toward liquids. In particular, the company plans to invest heavily in the development of its holdings in the Eagle Ford Shale, Granite Wash and Mississippi Lime.

However, we prefer to remain on the sidelines and see the stock performing in line with the broader market. Chesapeake holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We maintain our long-term Neutral recommendation for the company.