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Chesapeake Divests Shallow Natural Gas Devonian Assets

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Chesapeake Energy Corporation (CHK - Free Report) intends to divest a giant package of shallow natural gas assets in the U.S. region of Appalachia.

Though the sale will not be highly accretive to revenues, it will assist the U.S. shale giant to continue to streamline its portfolio. Reportedly, U.S junior – Core Minerals – is most likely the buyer. However, neither of the parties confirmed the news.

Chesapeake is divesting net acreage of 882,000 and about 5,600 wells as well as its associated assets and infrastructure in the Devonian shale trend in West Virginia and Kentucky.

As part of the deal, Chesapeake will have to repurchase a volumetric production payment (“VPP”), which facilitates an operator to sell rights to an assured amount of production over a given period of time in return for an advance payment.

Per the terms of the 2007 Kentucky and West Virginia VPP, Chesapeake brought in $1.1 billion in exchange of the rights to 208 billion cubic feet of natural gas production.
 

The agreement, which generated average output of about 34 million cubic feet per day (MMcfd) in the third quarter, has more than six years and 68.8 billion cubic feet of reserves left for production before it expires.

Much of the proceeds received by Chesapeake from this sale will be used to buy the VPP. In the past, Devonian shale has been produced conservatively where it was shallow and naturally fractured. In recent times, however, horizontal drilling has been used in areas where it is deeper and has greater pressure.

Currently, operators prefer the more prolific Marcellus and Utica shales instead of the groups of formations that underlies much of the Appalachian basin in the eastern U.S.

The deal is in sync with the company’s strategy to exit from the Barnett Shale, which was taken over by joint venture partner, Total SA (TOT - Free Report) .

In addition to its Devonian sale, Chesapeake intends to offload a pair of its asset packages in the Haynesville shale play. The company has already taken bids on a package of 73,000 net acres in southern Desoto and northern Sabine parishes in Louisiana that have a net production capacity of about 30 MMcfd.

Chesapeake targets substantial growth in production in the next two years. The independent aims for a 7% increase in exit-to-exit total production from the fourth quarter this year until the fourth quarter next year, adjusted for asset sales. Oil production is set to improve by 10%.

Chesapeake currently has a Zacks Rank #3 (Hold). Some better-ranked players from the same sector are SunCoke Energy Inc. (SXC - Free Report) and TransCanada Corporation (TRP - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SunCoke Energy posted a positive earnings surprise of 177.78% in the preceding quarter. It reported a positive earnings surprise in three of the four preceding quarters.

TransCanada posted positive earnings surprise of 22.92% in the last reported quarter.

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