Chesapeake Energy (CHK +0.00%), the second-largest natural gas producer in the U.S., has been busy selling off assets to raise much-needed cash.
After failing to meet its asset sales target last year, the company appears to be making better progress this year. According to COO and acting CEO Steve Dixon, Chesapeake has already signed or closed on $2 billion of asset sales so far this year, helping it move closer to its goal of $4 billion-$7 billion in asset sales by the end of the year.
Unfortunately, however, the metrics of Chesapeake's recent transactions look quite disappointing, with the company set to receive just a fraction of the price it thought its assets were worth. Let's take a look at two recent deals that appear especially underwhelming.
Joint venture agreement with Sinopec
In February, Chesapeake entered into a joint venture agreement with China Petrochemical Corp (SHI +0.00%), otherwise known as Sinopec, giving the Chinese energy company a 50% interest in a substantial chunk of Chesapeake's Mississippi Lime assets.
Under the terms of the deal, Sinopec received a stake in some 850,000 net acres controlled by Chesapeake, which yielded a per-acre value of less than $2,400. Importantly, that price tag was less than a third of the $7,000-$8,000 price range that Chesapeake estimated the land was worth in a company presentation last year.
It was also significantly less than the price per acre SandRidge Energy (NYSE: SD), another major Mississippi Lime operator, received for its acreage in two successive transactions in 2011. In August 2011, SandRidge got roughly $4,425 per acre from Korea-based Atinum Partners, and about $2,750 per acre from Repsol YPF in a subsequent transaction, for blocks of its Mississippi Lime acreage.
Moreover, the transaction price of the Sinopec-Chesapeake deal was even more disappointing considering that the acreage Chesapeake parted with included producing wells and a substantial amount of booked reserves.
According to Chesapeake's estimates as of year-end 2012, its acreage contained net proved reserves totaling about 140 million barrels of oil equivalent that were producing an average of roughly 34,000 barrels of oil equivalent per day in the fourth quarter.
Sale of Marcellus assets to Southwestern Energy
And then, most recently, was the sale of Chesapeake's natural gas assets in Pennsylvania prospective for the Marcellus Shale, which Southwestern Energy (SWN +0.00%), a leading natural gas producer, agreed to acquire for roughly $93 million.
The per-acre price tag for the sale came in at around $575 per acre, which appears quite cheap compared to similar transactions carried out in recent years. In 2011, for instance, acreage in that part of the Marcellus fetched between $1,500-$5,000 an acre, according to a note by Jefferies, the global investment bank.
The roughly 162,000 net acres sold include currently producing wells, whose net production totals roughly 2 MMcf per day from 17 gross, or 1.2 net, wells, according to Southwestern Energy's CEO Steve Mueller. The key acreage is mainly located in Pennsylvania's Susquehanna, Wyoming, Tioga, and Sullivan counties.
The fact that the per-acre price Chesapeake received was far below comparable transactions in the Marcellus is especially surprising considering the recent surge in natural gas prices, which should have made those assets more valuable to potential buyers.
What's next?
Chesapeake will continue with its asset sales strategy, though it plans on being less aggressive and toning down its sales pitch in an effort to avoid looking like a distressed seller. The company reckons that by achieving $4 billion in asset sales this year – the low-end of its target – it should be able to fully finance its investments for the year, while maintaining long-term debt at or below its year-end 2012 level.
