Is Chesapeake Energy’s $4 Billion Sale the Right Move?

Chesapeake Energy (NYSE: CHK  )  recently announced its plans to sell additional assets, and make several strategic changes in 2014. These changes are expected to cut down its annual production and operating cash flow. Following this news the company's stock dropped by almost 5%. Is this price cut justified? And are Chesapeake Energy's latest steps the right course of action? Let's take a closer look at the main expected changes and their potential effects on Chesapeake Energy.

Between spinoffs and sell-offs
The management of Chesapeake Energy decided to divest several assets, including three non-core assets in Southwestern Oklahoma, East Texas, and South Texas. These sales alone will bring in $310 million in cash. In addition, the company plans to spin off its fully owned subsidiary, Chesapeake Oilfield Services, to its shareholders. This will free up nearly $1.1 billion of debt, which is currently on Chesapeake Energy's books. This transaction is expected to come to fruition by the end of the second quarter. Chesapeake Energy also reached an agreement to sell its ownership of CHK Cleveland Tonkawa to preferred members. This divestment will erase $1 billion of equity attributable to third parties. It will also eliminate $160 million of balance sheet liabilities. 

Lower production – reduced cash flow
The company has revised its 2014 guidance for the second time this month. In the previous revision, its daily oil equivalent production rose to an average of 700 mboe mainly due to an expected rise in its NGL operations in the coming quarters. This came out to a 1.8% rise in its average production over the initial outlook.

This time, however, the company revised down its oil equivalent production by 2.1% from the second estimate and by 0.4% from the first figure. Its current guidance is set at an average of 685 mboe. This reduction is due to the above-mentioned asset divestment. This will also translate to a $250 drop in Chesapeake Energy's operating cash flow in 2014, according to its CEO Doug Lawler. This means a 5% decline in its annual operating cash flow. Despite these cutbacks, these transactions are likely to benefit the company in terms of debt, dividend, and interest payments.

Improved balance sheet
These transactions are projected to improve the company's balance sheet by slashing its debt by nearly $3 billion. For a company with a total debt of almost $13 billion, these asset sales will reduce its debt burden by 23%. In total, Chesapeake Energy's 2014 asset sales (including the assets sold before this announcement) will come to more than $4 billion. This will also be part of its asset divestment in recent years; after all back in 2012 it sold $6.9 billion of its assets; in 2013 it sold 50% of its ownership in its Mississippi Lime acreage for $1.02 billion. Therefore, these recent assets sales are in line with Chesapeake Energy's strategy of the past three years.

The company expects the recent asset divestment to slash its capital expenditures by nearly $200 million; they are also projected to cut interest expense and dividend payments by $70 million during the year.

Bottom line
Chesapeake Energy's recent decision to sell additional assets will have only a modest negative impact on its total production or operating cash flow. Moving forward, the asset divestment could reduce the company's financial risk by cutting its debt. Finally, these asset sales will also free up some cash, which could allow the company to invest in other more profitable projects.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2966926, ~/Articles/ArticleHandler.aspx, 10/31/2014 2:35:23 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement