UPDATE: Post announcement analyst commentary by Wunderlich Securities added October 31.
Chesapeake Energy Corp. (NYSE:CHK) has executed a purchase and sale agreement to sell assets in the Southern Marcellus shale play and a portion of the Eastern Utica shale play in West Virginia to Southwestern Energy Co. (NYSE:SWN) for aggregate proceeds of $5.375 billion.
Chesapeake has agreed to sell 413,000 net acres and 1,500 wells in Northern West Virginia and Southern Pennsylvania, of which 435 are in the Marcellus and Utica formations, along with related property, plants, and equipment. Average net daily production from these properties was 56,000 barrels of oil equivalent (boe) during the month of September, consisting of 184,000 Mcf of gas, 20,000 barrels of natural gas liquids, and 5,000 barrels of condensate. As of Dec. 31, 2013, net proved reserves associated with these properties were 221 million barrels of oil equivalent.
On news of the deal, Standard & Poor's Ratings Services revised the rating outlook on Chesapeake Energy to positive from stable. It affirmed its 'BB+' corporate credit rating on the company and its 'BB+' issue-level rating on the company's senior unsecured debt.
"Completion of the Southern Marcellus divestiture should provide Chesapeake with sufficient wherewithal to reduce financial leverage to a greater extent than assumed in our base case scenario, but management has not clarified the specific use of proceeds, and we perceive there to be uncertainty on this point," said Standard & Poor's credit analyst Scott Sprinzen.
The firm continued that "if Chesapeake were to take actions that resulted in an incremental reduction of debt and debt-like liabilities of more than $5 billion-–such that debt and debt-like liabilities totaled less than $11billion--then debt to EBITDA would be sustainably below 2x over the next two years. This could result in an upgrade and the revision of our financial risk profile assessment to significant from aggressive.
"On the other hand, the rating could be jeopardized if, contrary to our expectations, there were some combination of a failure to complete pending asset sales, operating setbacks, or a growth strategy and financial policy that were more aggressive than we now anticipate," the firm concluded.
Wunderlich Securities analysts believe deal "shows the asset strength of Chesapeake, improves an already improving balance sheet, and helps focus the company on its active/core areas." In a note dated October 17, the analysts say the deal makes sense from a monetization perspective given the differential/takeaway issues that Chesapeake and others have seen in the region coupled with better opportunities that the company has in other regions. As for price, the deal is "about as high of a price for natural gas assets/acreage we have seen in a long time," the analysts continued.
The transaction, which is subject to certain customary closing conditions, including the receipt of third-party consents, is expected to close in the fourth quarter of 2014.