Natural gas provider Chesapeake Energy Corporation (CHK) has entered into a definitive agreement to sell proven reserves and undeveloped leasehold interests in Kingfisher and Canadian counties, OK to Houston-based energy company Gastar Exploration Limited (GST) for $75.2 million.
Gastar would also buy back its common shares held by Chesapeake for $9.8 million and settle all litigation.
The acquisition includes drilling rights in about 157,000 net acres that are adjacent to Gastar's existing Mid-Continent acreage and around 2.8 million oil-equivalent barrels (MMBoe) of proven reserves. The transaction is expected to close on or before Jun 7, with a property purchase effective date of Oct 1, 2012.
Included in the transaction are 176 producing wells, of which half will be operated by Gastar, with an estimated present value of proved reserves of $32.4 million, holding around 19% of the acreage by production. The current net daily production is approximately 177 barrels (Bbls) of crude oil, 54 Bbls of natural gas liquids (NGLs) and 3.5 million cubic feet (MMcf) of natural gas.
Gastar would also buy back Chesapeake’s entire holding of about 6.8 million shares of Gastar's stock at $1.44 per share. Chesapeake's holdings were close to 9.9% of Gastar's total shares outstanding.
Finally, the duo would also settle their ongoing litigation in the U.S. District Court for the Southern District of Texas in lieu with reimbursement of well costs.
The sell of assets and shares are in line with Chesapeake’s strategy to reduce its long-term debt through monetizing its assets and cutting lease-hold spending. At the end of fourth quarter 2012, the debt balance stood at $12.2 billion, representing a debt-to-capitalization ratio of 40.5%. The Gastar transaction is mainly aimed at reining in debt as well as filling the funding gap for its mounting expenses in the wake of continued low natural gas prices.
Natural gas accounted for about 77% of Chesapeake’s fourth quarter 2012 production, making results vulnerable to fluctuations in the natural gas market. Chesapeake is the second-largest producer of natural gas in the U.S. after Exxon Mobil Corporation (XOM).
Chesapeake currently retains a Zacks Rank #3 (short-term Hold rating). There are other stocks in the oil and gas industry, like Range Resources Corporation (RRC) with a Zacks Rank #2 (Buy), which appear more promising.
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