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Chesapeake Energy Corporation (CHK - Analyst Report) plans to sell a 50% share in some of its oil and gas properties in the Mississippi Lime shale formation to China Petroleum & Chemical Corp/Sinopec (SNP - Analyst Report).
The all-in-cash transaction is valued at $1.02 billion, which fell short of most of the analysts’ expectations. Per the deal, 93% of the total money (or about $950 million) will be received upon completion of the transaction, while the remaining amount will be received after other customary closing conditions are met. The companies aim to wrap-up the agreement by the second quarter of this year.
An embattled Chesapeake has divested properties worth billions to minimize capital expenditure amid diminishing cash flows in a weak natural gas price scenario. The latest deal takes into account 50% share of the company’s 850,000 leasehold acres spread over the Mississippi Lime play in northern Oklahoma.
During the recently reported quarter, the assets produced about 34,000 barrels of oil equivalent per day. Most of the production comprised crude oil or natural gas liquids. As of the end of 2012, the to-be sold properties held approximately 140 million barrels of oil equivalent of net proven reserves.
Chesapeake, the second-largest producer of natural gas in the U.S. after ExxonMobil Corporation (XOM - Analyst Report), intends to shed $4 billion to $7 billion worth of assets this year. Per the latest accord, the total transaction price equates to only $2,400 an acre, which is much less than Chesapeake’s valuation of 7,000 to $8,000 for the asset in a July 2012 presentation. Hence, this divestiture deal pulled down Chesapeake’s shares by 6.8% to $19.11 in a day in the New York Stock Exchange on Monday, Feb 25, the largest daily decline since Nov 2.
This reveals that Chesapeake is desperate to shed properties to raise money to bridge its funding shortfall. This is also to note that the Mississippi Lime formation is less developed. Hence, the region is much riskier than the Bakken shale formations or the Eagle Ford formation in Texas.
On the other hand, Sinopec will gain a bigger foothold in North America with this acquisition. As the world's second-largest economy, China has a huge energy requirement. Chinese biggies are making deeper inroads these days into the international energy markets with the specific aim of meeting domestic demand.
Coming back to Chesapeake, last week it posted its major annual loss since 2009. As of Dec 31, 2012, its debt balance stood at $12 billion. Chesapeake currently retains a Zacks Rank #3 (short-term Hold rating), while Sinopec holds a Zacks Rank #2 (Buy). There are other stocks in the oil and gas industry, like Range Resources Corporation (RRC - Analyst Report) with a Zacks Rank #2 (Buy), which appear more promising.