Chesapeake agrees to sell Permian, midstream and certain Utica assets for $6.9B

Agreements alleviate near-term funding concerns, but 2012 funding gap remains a concern

Chesapeake Energy Corp. has entered into multiple agreements to sell the vast majority of its Permian properties, substantially all of its midstream assets and certain noncore leasehold for total net cash proceeds of approximately $6.9 billion.

Chesapeake has entered into purchase and sale agreements with three companies covering the vast majority of its Permian Basin assets for total net proceeds of approximately $3.3 billion. The Permian Basin assets being sold produced approximately 21,000 barrels of liquids and 90 million cubic feet of natural gas per day during the 2012 second quarter, or approximately 5.7% of Chesapeake’s production during the quarter.

Chesapeake has entered into a purchase and sale agreement to sell its assets in the southern Delaware Basin portion of the Permian Basin to SWEPI LP, a subsidiary of Royal Dutch Shell plc. Additionally, Chesapeake has entered into a purchase and sale agreement to sell its assets in the northern Delaware Basin portion of the Permian Basin to Chevron USA Inc., a subsidiary of Chevron Corp. As previously announced, the company has entered into a purchase and sale agreement to sell its producing assets in the Midland Basin portion of the Permian Basin to affiliates of Houston-based EnerVest Ltd. Chesapeake is retaining approximately 470,000 net acres of undeveloped leasehold in the Midland Basin for future sale or development. Chesapeake expects to close all three transactions within the next 30 days and to receive approximately 87% of the proceeds in cash at closing. Payment of the remaining proceeds will be subject to certain title, environmental and other standard contingencies.

In addition, Chesapeake has entered into sale agreements with respect to substantially all of its midstream assets in three separate transactions and also expects to enter into a fourth agreement, which would result in combined proceeds of approximately $3.0 billion. The company has entered into a letter of intent with Global Infrastructure Partners (GIP) covering most of the midstream assets owned by Chesapeake Midstream Development LP, a wholly owned subsidiary of Chesapeake, for expected proceeds of approximately $2.7 billion. The assets to be sold to GIP include gathering and processing systems in the Eagle Ford, Utica, Haynesville and Powder River Basin Niobrara shale plays and certain other assets. The transaction with GIP would include new market-based gathering and processing agreements covering certain acreage dedication areas and also include one new volume commitment covering approximately 70% of the company’s expected production volumes in the southern portion of our Haynesville Shale area during 2013-17. In addition, Chesapeake has sold or entered into purchase and sale agreements with two other companies to sell certain Mid-Continent midstream assets and also expects to enter into a fourth agreement to sell certain oil gathering assets in the Eagle Ford Shale for combined proceeds of approximately $300 million.

The midstream transactions are expected to close on various dates in the 2012 third and fourth quarters. When combined with the previous sale of its limited and general partnership interests in Access Midstream Partners LP (formerly known as Chesapeake Midstream Partners LP) in June 2012 for approximately $2.0 billion, Chesapeake’s total proceeds from its midstream exit will be approximately $5.0 billion.

Finally, in four separate transactions, Chesapeake has recently sold or entered into purchase and sale agreements to sell noncore leasehold assets in the Utica Shale and various other areas for approximately $600 million. Chesapeake will continue to own approximately 1.3 million net acres of leasehold in the Utica Shale, in which its cost basis, net of various sales and its joint venture with Total, will be approximately $200 per net acre (including all drilling carries in the Total joint venture).

Jefferies & Company, Inc. and Goldman, Sachs & Co. are serving as financial advisors to Chesapeake regarding the Permian Basin asset sales and the sale of midstream assets to GIP.

Aubrey K. McClendon, Chesapeake’s CEO, stated, “The net proceeds of approximately $6.9 billion from the sales discussed today are in addition to the $4.7 billion of sales previously closed in the 2012 first half and will bring our 2012 year-to-date sales to $11.6 billion, or approximately 85% of our full-year goal of $13-14 billion, which we expect to achieve by year end.”

Analyst views
Analysts at Global Hunter Securities view the transactions as a positive for Chesapeake. “$3.3B in booked Permian proceeds + a fair range of value for CHK’s unsold 475K Permian acres puts the company well within the expected Permian sale range of $4B-$6B. CHK’s announced midstream divestitures of $3B also exceed our expectations and the sale of Utica acreage at $600MM, while not knowing how much acreage was involved, still seems welcome given CHK’s net position remains at a substantial 1.3MM acres.”

Analysts at Jefferies & Co. felt the $3.3 billion paid for the company’s Permian assets was “relatively light.”

“Per flowing boe metric of $92k seems a bit below recent comparable transactions, which tend to be above $100k. Shell paid a lower $74k per flowing boe for its portion of the assets in the southern Delaware Basin, which means Chevron and EnerVest paid roughly $137k for their parts in the northern Delaware and Midland basins, Per acre metric of $3,200 also seems lower than some other Permian transactions we've seen,” the analysts said in a note to investors following the announcement.

Combined with the proceeds from the midstream assets and elsewhere, however, overall proceeds are in-line with Chesapeake’s $7.0 billion expectations. While the agreements alleviate near-term funding concerns, the company’s 2013 funding gap, estimated by Jefferies to be more than $4 billion, remains a concern, said the analysts.


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