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Chesapeake boosts divestiture range

by Claire Poole | Published February 15, 2012 at 9:23 AM

Oklahoma City oil and gas explorer Chesapeake Energy Corp. boosted its possible divestiture range to $10 billion to $12 billion from $7 billion as part of its plan to pay down debt and cover its funding gap amid low natural gas prices, the company said in a statement Monday.

Chesapeake expects to receive $2 billion in the next two months in two transactions, including a volumetric production payment on its Texas Panhandle Granite Wash assets and the sale of part of its properties in Ellis and Roger Mills counties in Oklahoma. The company is also pursuing joint venture transactions in its Mississippi Lime leasehold, which straddles the Kansas/Oklahoma border and amounts to 1.8 million net acres, and its Permian Basin leasehold, which is located in West Texas and amounts to 1.5 million net acres.

Chesapeake also revealed that it has received inquiries about selling all of its assets in the Permian Basin, which it is considering if it receives "a compelling offer." Its acreage is one of the six largest in the Permian and represents 5% of its net proved reserves and production.

Chesapeake believes the Mississippi Lime joint venture, a Permian Basin transaction and various other minor asset sales could result in cash proceeds of $6 billion to $8 billion this year. It hopes to complete those sales by the third quarter. Chesapeake also expects monetization proceeds of $2 billion this year involving part of its midstream assets, service company assets and other investments.

Jefferies & Co.'s Ralph Eads is advising Chesapeake on its asset sales.

Reaction to the news was mixed. Some thought Chesapeake's moves-including the sale of its valuable Permian assets, which it amassed just recently-were an act of desperation, while others thought the overall plan would make for a stronger company.

Analysts at Tudor Pickering Holt & Co. Securities Inc. wrote in a note Tuesday that they believe that Chesapeake is going to "do what they say" on the activity and spending side and will get $6 billion to $8 billion in cash proceeds by the end of the third quarter and $10 billion to $12 billion by the end of the year that will more than cover its funding gap, which the firm estimates at $5.5 billion. "Once done, overhang on [the] stock likely fades and focus returns to where it should be long-term-on the assets and valuation," the analysts said.

Philip Adams, an analyst at bond research firm GimmeCredit LLC, was also pleased by the news, saying Chesapeake's "aggressive land grabs" in the past are now leading to profitable harvesting through sales, investor participation agreements and production.

One industry source counted himself among the doubters, however, when hearing about the company's plans. "Chesapeake is in serious trouble," the source said. "Its Enron style of media hype, off-balance sheet accounting and excessive leverage has finally caught up with them. The end appears to be close."

Moody's Investors Service lowered Chesapeake's ratings outlook to stable from positive, noting the adverse effect of weak natural gas prices on Chesapeake's cash flow.

Chesapeake's stock edged up slightly Monday from $22.13 to $22.66 and was trading flat in morning trading.

Chesapeake said the expected proceeds are substantially more than the difference between its expected cash flow from operations and its planned capital expenditures and would allow the company to achieve its debt reduction goals while providing additional financial strength during this period of low U.S. natural gas prices. Chesapeake has said it wants to cut its long-term debt to no more than $9.5 billion or 35% of total capitalization by the end of the year.

Chesapeake also announced plans Monday to issue $1 billion of senior notes in a public offering on the New York Stock Exchange so it can refinance or partially refinance other shorter dated maturities later in the year and for general corporate purposes.

It ended up increasing the offering to $1.3 billion and pricing it Monday night at 98.75% of par to yield 7%.

The notes will carry an interest rate of 6.775% per year and be due in 2019. Chesapeake expects $1.26 billion of proceeds after deducting underwriting discounts and commissions.

Closing for the note offering is expected Feb. 16. Bank of America Merrill Lynch, Deutsche Bank Securities Inc., Goldman, Sachs & Co., Morgan Stanley and RBS Securities Inc. are joint book-running managers for the offering.

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