On Thursday, Plains All American (NYSE:PAA) announced that it will acquire Chesapeake Energy's (NYSE:CHK) crude oil and condensate gathering assets in the Eagle Ford shale. On a typical day, I would use this space to wax poetic on Plains' growth strategy, touting management's vision and the quality of the assets it's picking up -- throughput capacity of 50,000 barrels per day and 450,000 barrels of storage capacity -- but I've been doing that a lot lately, so today is all about Chesapeake.
Peanuts, popcorn, natural gas acreage
Desperate times call for desperate measures, and Chesapeake's balance sheet is a case in point. At the beginning of 2012, the company announced that it planned to sell approximately $12 billion in assets over the course of the year to meet a budget shortfall.
Here are the major asset deals the company has initiated this year:
- $125 million in the Plains deal.
- A $6.9 billion sale of its Permian Basin assets to Royal Dutch Shell (NYSE:RDS-A) and Chevron (NYSE:CVX).
- A $2.6 billion sale, announced earlier this week, of most of its remaining midstream assets to Access Midstream Partners (UNKNOWN:ACMP.DL), part of a larger $4.88 billion deal announced in June.
If the Plains deal closes by the end of the year as expected, Chesapeake will have reaped $10.8 billion this year from jettisoning assets, with another $425 million set to close early next year -- prompting at least one cynical investment writer to cry out, "What's left?"
Chesapeake's work isn't done yet. The company's debt load is such that it will have to sell another $4 billion in assets next year to plug its budget gap. Chesapeake has long employed a strategy of buying up incredible amounts of acreage early, before a play has proved itself. Sometimes, as is the case in the Eagle Ford, it pays off. Other times, in the case of its assets in Michigan, its investment doesn't quite pan out. Regardless, Chesapeake certainly has plenty of acreage to sell, and it shouldn't struggle to make $4 billion worth of asset sales next year.
Chesapeake has been absolutely crushed by poor management and the bottom-dwelling price of natural gas. The price of gas will rebound eventually, and the company's share price may follow. Investors looking for an underdog natural gas play should consider it, but those keen on finding companies with good corporate governance should continue to look elsewhere.