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Chesapeake to Sell Utica Assets

Zacks Equity Research

Embattled Chesapeake Energy Corp. (CHK) is trying hard to minimize capital expenditure through its divestiture program. The company plans to sell 337,481 net acres of Utica-Point Pleasant Trend acreage in Ohio, as per a prospectus released by Denver-based Meagher Energy Advisors.

The to-be sold assets include drilling rights in 19 Ohio counties that are mainly situated to its north-east and south-east. Northeast Ohio counties comprise Huron, Lorain, Ashland, Wayne, Summit, Geauga, Portage, Asthabula and Trumbull counties. The southeastern counties are Licking, Muskingum, Fairfield, Perry, Morgan, Washington, Athens, Hocking, Vinton and Meigs.

This latest asset sale program remains restricted to the Cincinnati, Utica, Point Pleasant and Trenton intervals. The Utica acreage for sale also includes two wells that were operated by Chesapeake. One stratigraphic test well that was temporarily plugged was drilled this year. The other one, an exploration well, will undergo hydraulic fracturing in July. The property also holds five non-operated wells that were drilled between 1995 and 2005.

Notably, the sale will likely change Chesapeake's strategy to develop its highly potential Utica acreage as it plans to drill a considerable number of wells for the Utica oil window through 2012. The company is now keen to focus more on money-spinning oil and liquids production as well as on the development of areas in the Utica where its holdings are more concentrated.

Recently, the second largest natural gas producer in the U.S., after ExxonMobil Corporation (XOM), also announced plans to divest approximately 504,000 net acres of land that includes leases for oil and gas production in the Denver-Julesberg (:DJ) Basin of northern Colorado and southern Wyoming. The properties set for sale also comprise 29 operated and producing wells in the southern portion of the DJ Basin as well as Chesapeake's share in 24 non-operated wells. Some of the properties are also situated in the Niobrara shale.

This sale of half a million acres of its holdings in the Rocky Mountains covers Chesapeake's entire holdings in northeastern Colorado. The divestiture will enable it to focus more on the development of its 500,000 net acre Niobrara leasehold in the Powder River Basin located in east central Wyoming.

The company has been in the news in recent times as it is struggling to fund its capital budget amid diminishing cash flows. Chesapeake intends to offload as much as $11.5 billion worth of assets this year in order to bridge the funding gap of $9 billion to $10 billion.

Recently, Chesapeake also increased the size of its unsecured term loan to $4 billion from $3 billion, for paying down its revolving credit line. The new loan comes at an initial interest rate of 8.5%, which could eventually exceed 11.5% if the company fails to pay it off by the end of the year.

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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