Is Chesapeake Waving the White Flag on the Marcellus?

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Last month Chesapeake Energy (NYSE: CHK  ) announced it was selling 162,000 net acres above the Marcellus Shale to Southwestern Energy (NYSE: SWN  ) at a fire-sale price. The $93 million deal, which enabled Southwestern to double down on its Marcellus acreage, represented just a pittance of the $4 billion-$7 billion in asset sales Chesapeake is planning on this year.

Just a week after, Chesapeake unloaded another slug of Marcellus acres, this time to EQT (NYSE: EQT  ) . This deal included roughly 99,000 acres of which 67,000 are in the Marcellus and another 32,000 are in the dry gas area of the Utica. Chesapeake will get a bit more money for these acres as the company and its partners pulled in $113 million. Of that purchase price $53 million is allocated to the 10 Marcellus wells that had already been drilled, seven of which won't be turned into sales until the latter half of this year.

It's those wells, and about 25,000 of the acres that interests EQT the most as those acres are within the company's core Marcellus development area. The company said in its press release announcing the deal that the rest of the 42,000 Marcellus acres are unlikely to be developed due to near-term lease expirations or a more scattered footprint. So, when looking at the deal in that context, Chesapeake really just threw them in there to get those acres off its books.

What we're seeing at Chesapeake, instead, is the company's next phase as it trims away at the outliers to focus only on the core of its core assets. This means selling off smaller non-core assets like these two recent Marcellus deals in order to optimize its portfolio and focus its attention.

In fact, these latest assets sales in no way mean the company is waving the white flag and giving up on the Marcellus. Despite slashing its capital budget this year by 39% and spending 86% of that new budget on liquids-rich plays, the Marcellus is still a focus for the company. Of its total capital budget the company is spending 14% between its Marcellus north and south positions.

What it's doing instead is focusing on the core of its core Marcellus acreage. In the dry gas northern Marcellus the company owns 100,000 acres with around 1,000 remaining drilling location in the acreage that it's deemed the core of the core. The company is still currently operating five drilling rigs in that section while it only has three rigs in its wet gas acreage in the southern portion of the Marcellus.

Make no mistake about it, these recent deals were not about funding its capital plans for the year. Instead, these deals are about getting back to its core and focusing its efforts on only its best opportunities. Expect to see similar one-off deals as the company plods on its new path forward to realize the value of the assets it has by ridding itself of those non-core outlier assets that have taken up too much of its attention over the years.

As Chesapeake Energy continues to move forward on its new path its real value will begin to become clear. As you likely know, its share price has been hit by negative news and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.

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  • Report this Comment On June 01, 2013, at 3:58 PM, susan400 wrote:

    This article typifies the risk in “write our own analysis” TMF style. 1. I appreciate TMF for many reasons 2. but think what they intended to do at the beginning is near all lost. Be you own analyst and write for us feeds egos, “hey I know stuff too and I feel clever writing for this big audience”. For those who few actually analyze, increase knowledge with the objective of finding suitable places to place their capital, this do you own is anti-thematic. 3. Without going into detail, there is no suggestion anywhere that CHK is ditching the Marcellus, none, they have a mass of acreage overlying the strata but only parts have the required elements to have commercial success. 4 Instead of managing leases with variant expirations et al, a lot to manage, only a small portion which is prospective, CHK cleaned house, 90% of more of the lease sale to SWN is none prospective. 5. Similar with their sale of SW PA leases to EQT. EQT has a lot of leases and producing wells in SW PA and can comb over and use some of the leases, let other expire. SWN will utilize a small portion of the NE PA leases it acquired, seize on those few and let the rest expire. In ~2011, SWN bought 28 k of leases from Boone’s co, Exco, for near nothing, EXO test drilled and that whole 28k in N Lackawanna Cnty was deemed dead > over mature. SWN might have developed 1-2k A and the rest expired in Apr 2013. Period.

    Core pa MARCLLUS leases are worth 10-30k per acre. Acreage with C grade marcellus are worth 500 to 1k$. Thus the 93k$ price for hundreds of 1000s of acreage-.

    Your statement that SWN doubled their position is blatantly false, and misleading, a. It is intuitive, the “GOOD” is so good, there is no way the price would be that low. SWN may have added 10-20 k acres to their position. It is known they are the low-cost developer and will drill C+, B-, B grade rock, that other will not and that is onpy if infrastructure is in place and requires n0o additional investment.

    CHK is experiencing a MASS culture shift, from a single wildcatter ego to something more sane, WE all, investors: long & short, lessors, partners (Statoil, Anadarko etc) all are watching very closely to see what unfolds. How that unfolds IS a story that a TMF type might research and observe and bring value. CHK has massive assets, but huge debt, what Px NG do they need to survive and avoid Chap 11. ETC.

    SWN is frugal in all ways but are reaching out to newer riskier plays, a nice balance of high confidence vs. test areas with ¼ chances. To my mind they are an ideal. in management a GOOD study. They waste no $, they do not even buy hats to handout! And where they do speeding is on science, they with Range are the twp TOP science harnessing entities.

    Last the author didn’t read the press release. CHK identified what they term their CORE of CORE, ok?, and in the CORE of CORE, they have 100k acres and 10 yrs of drilling inventory. What they term core, is larger than 100k A, has good economics, just not superior. Overall CHK has a very valuable asset in their SW and NE PA positions. Lok at thee returns, at 4$ returns are super.

    As recently as 2009, the expected long range Px for NG was 7-9$, with the Bakken, Eagle Ford, Marcellus plus smaller plays uncovered one month it seems, B- C= and C grade marcellus will never see a drill bit, drilling capital goes to where the economics are, CORE will be developed, but capital beyond that will go to the new smaller plays with better economics.

    Regards, susan400

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