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Chesapeake to Get $6.9B from Sales

Zacks Equity Research

Natural gas giant Chesapeake Energy Corporation (CHK) continues with its divestiture plans, a serious attempt to narrow cash-flow shortfall while shifting gears to oil-directed drilling from natural gas. The company has entered into a series of transactions to sell a major portion of its properties and infrastructure in west Texas for a total consideration of $6.9 billion.

Oklahoma City-based Chesapeake said it has inked deals worth $3.3 billion, with the affiliates of Royal Dutch Shell Plc (RDS.B), Chevron Corp. (CVX), and Houston-based EnerVest, Ltd. to divest the southern Delaware Basin section, northern Delaware Basin portion and Midland Basin portion of the Permian Basin, respectively.

The to-be-sold properties represent 5.7% of the company’s second quarter production. Chesapeake will get about 87% of the proceeds in cash upon closing, which are expected to complete within a month. However, the balance amount is subject to certain title, environmental and other standard contingencies. The company will hold about 470,000 net acres of undeveloped leasehold in the Midland Basin for future marketing or development.

Again, Chesapeake plans to sell off most of its midstream assets to Global Infrastructure Partners (:GIP) for about $2.7 billion. These include gathering and processing systems in the Eagle Ford, Utica, Haynesville and Powder River Basin Niobrara shale plays.

The company has entered into additional deals to shed some of its Mid-Continent midstream assets that are expected to generate proceeds of about $300 million. Other deals in the Utica Shale are expected to fetch about $600 million. Upon closing of these transactions, Chesapeake will still hold approximately 1.3 million net acres of leasehold in the Utica Shale.

Chesapeake remains focused on its asset monetization initiatives as the company is trying hard to minimize capital expenditure and devolve as much as $14.0 billion worth of assets this year and an additional $4 billion to $5 billion in 2013. The company has been in the news in recent times as it is under pressure to fund its capital budget amid diminishing cash flows given the cascading natural gas prices.

During the first half of 2012, the company has already raised $4.7 billion bringing the total proceeds to about $11.6 billion (including the $6.9 billion in its latest asset sale agreements) as of now. Hence, the company has achieved 85% of its full-year target.

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 for the company.

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