Over the past year or so, Chesapeake Energy (NYSE:CHK) has been busy selling off several of its oil and gas assets, as the nation's second-largest natural gas producer tries to raise much-needed cash.
It recently sold off some of its interest in a sizable portion of its Mississippi Lime acreage to a major Chinese oil company. Though the deal brought in a little over $1 billion, the price Chesapeake received per acre was just a fraction of what the company said the acreage was worth last year.
This raises some serious concerns. Did Chesapeake get ripped off? Or does the transaction simply serve as a reminder that beggars can't be choosers, or distressed sellers can't expect to receive a desirable price?
Sinopec-Chesapeake joint venture
Last month, Chesapeake struck a deal with China Petrochemical Corp (NYSE:SHI), otherwise known as Sinopec, that will give the Chinese energy producer a 50% interest in a substantial chunk of the company's acreage in the Mississippi Lime formation.
Under the terms of the agreement, Sinopec will be getting a 50% stake in some 850,000 net acres controlled by Chesapeake, which comes out to a price per acre of less than $2,400 – less than a third of the $7,000-$8,000 price range that Chesapeake claimed the land was worth in a presentation last July.
The transaction price appears even more underwhelming when you consider that the acreage Chesapeake is parting with includes producing wells and a large amount of booked reserves. Production from the 850,000 net acres averaged roughly 34,000 barrels of oil equivalent per day in the fourth quarter, of which 45% was oil, 46% natural gas, and the remaining 9% was natural gas liquids production. According to Chesapeake's year-end estimates, the land contains net proved reserves totaling about 140 million barrels of oil equivalent.
A poor showing for Chesapeake
While I wasn't expecting Chesapeake to receive the lofty per-acre price that the company claimed the acreage to be worth, the fact that it got just a third of the price it was expecting is a bit surprising, especially considering that Aubrey McClendon arranged front row seats for Sinopec Chairman Fu Chengyu at game two of the NBA Finals last June. Here's a picture of him at Chesapeake Energy Arena in Oklahoma City (that's him to the right of Derek Fisher).
It's a little puzzling that McClendon couldn't use his charm to convince the Sinopec chairman to fork over at least a few hundred more dollars more per acre for the Mississippian assets. I mean, c'mon, from $7,000-$8,000 per acre to just under $2,400 per acre? For acreage that was producing 34,000 barrels of oil equivalent per day in the fourth quarter? That's a pretty sorry showing. But maybe the Sinopec chairman's just not a big fan of basketball.
Distressed prices for a distressed seller
Even compared to previous Mississippi Lime land sales, the per-acre price Chesapeake received appears to be both undeserved and an outlier. Consider SandRidge Energy's (UNKNOWN:SD.DL) successive Mississippi Lime transactions in 2011, which both fetched higher prices per acre.
Back in August 2011, when SandRidge entered a joint venture with Atinum Partners, it gave the Korea-based firm a 13.2% working interest in about 113,000 net acres for $500 million, which comes out to $4,425 per acre. Shortly thereafter, SandRidge entered another joint venture with Repsol YPF, giving up a little over 360,000 net acres for $1 billion, which equates to a per acre price of roughly $2,750.
Importantly, both of these sales were for acreage that was significantly less developed and did not have any currently producing wells. In contrast, Chesapeake's 850,000 acres have seen plenty of drilling activity over the past several years and are characterized as "the heart of the Mississippi Lime" by Morningstar analyst Mark Hanson.
The arrangement with Sinopec is the latest development in Chesapeake's asset sale program – a strategy the company hopes will help reduce a sizable cash-flow deficit. Last year, Chesapeake came close to, though ultimately failed in, meeting an ambitious asset sales target of $12 billion.
In addition, the prices it received for several key properties last year were much lower than the company's initial projections, illustrating the woes of being a distressed seller trying to divest large chunks of oil and gas assets, or perhaps a management that consistently overshoots on its targets.
At any rate, it appears that Chesapeake did indeed get ripped off on its most recent transaction. And since the company was depending on the sale of its Mississippi Lime assets to take care of a substantial portion of its asset sale target for the year, the much lower than expected transaction price should be an even bigger concern.