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Chesapeake Offloads Permian Assets

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Recently, US natural gas giant Chesapeake Energy Corporation (CHK - Free Report) closed the sale of its assets in the Permian Basin. The asset sale was a part of the company’s plan to repay its term loan of $4.0 billion by the end of 2012.

It’s southern Delaware Basin assets in the Permian Basin were sold to SWEPI LP – a subsidiary of Royal Dutch Shell plc ; northern Delaware Basin part to Chevron U.S.A. Inc. – a subsidiary of Chevron Corporation (CVX - Free Report) and producing assets in the Midland Basin to affiliates of EnerVest.

Chesapeake received $3.3 billion through these three dealings, which comprised $2.8 billon cash. The balance proceeds are subject to certain title, environmental and standard contingencies.

During the second quarter of 2012, the sold assets produced 21,000 barrels of liquids and 90 million cubic feet of natural gas per day. It was about 5.7% of total production during the quarter.

Earlier this month, Chesapeake inked a deal to sell certain assets in western Oklahoma, in a bid to narrow cash-flow shortfall while shifting gears to oil-directed drilling from natural gas.

Chesapeake is on track with its plan of reducing its long-term debt by monetizing its assets and curbing lease-hold spending. This monetization initiative is mainly aimed to cope with the mounting debt level as well as to fill the funding gap for its 2012 expenditures that resulted from low natural gas prices.

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 on the company.

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