It's been a really busy year for Chesapeake Energy (CHKA.Q) as it's been jettisoning assets at a fairly steady pace. The company has already announced $2.3 billion in divestitures so far this year which the it says keeps it on target hit the planned $4 billion-$7 billion of dispositions before the end of the year. Amid all the wheeling and dealing, there is one important insight that investors need to realize. Chesapeake is keeping the best assets for itself.
A lot has been made of Chesapeake's sales this year. We've wondered if the company had been ripped off when it entered into a joint venture with some of its Mississippi Lime acres. We've also pondered if the company was simply now in fire-sale mode to meet its budgetary needs; it's no secret that Chesapeake's greatest challenge is funding its growth plans.
Source: Chesapeake Energy
The thing is, when you look back at all these sales, you see that the asset exodus has one thing in common. None of these assets are actually core to the company's business. Take its two recent sales in the Marcellus, a $93 million sale of 162,000 acres to Southwestern Energy (SWN 0.14%) and a $113 million sale of 99,000 acres to EQT (EQT 1.19%). In both cases we have a sale of acres outside of what Chesapeake has deemed its "core of the core." Further, both sales had little current production.
The EQT sale included just three currently producing wells with another seven scheduled to come on line by the end of the year. In total these wells represent about a billion cubic feet equivalent of production. What's even more interesting, EQT pointed out that almost half of the acres it was acquiring wouldn't even be developed as many had near-term lease expirations while others were too scattered to be developed.
The Southwestern deal also included little current production as the 17 gross wells only produce 2 MMcf of natural gas per day. These were largely undeveloped acres much closer to Southwestern's current leasehold than Chesapeake's core acreage. Again, we see an instance where the company was able to jettison an asset that really didn't have a whole lot of value for Chesapeake.
Even more recently we've seen Chesapeake sell off some of its remaining midstream assets. In one deal it sold certain of its Granite Wash assets to MarkWest Energy Partners (NYSE: MWE) for $245 million in cash, while in an earlier deal Chesapeake sold its Mississippi Lime gathering and processing assets to the SemGroup (SEMG) for $300 million.
There's one other key takeaway from these deals. While Chesapeake is getting cash up front, it's also saving itself hundreds of millions in future capex. Take the SemGroup deal, which included the Rose Valley I and II processing plants. The first plant won't be operational until early next year, while the second plant has a 2016 start date. Further, it will require another $125 million in additional capital expenditures to bring both plants online.
It's a similar story with the MarkWest deal. To support Chesapeake's drilling program related to the assets its acquiring, MarkWest will need to invest another $90 million over the next five years. Here again Chesapeake is not only getting cash up front but its cutting out future capital expenditures.
That being said, Chesapeake isn't getting something for nothing. In both of these deals the company signed long-term processing and gathering agreements. In the MarkWest deal, it anticipates generating $30 million in EBITDA from the deal next year with EBITDA growing to more than $50 million by 2017. In the SemGroup deal Chesapeake committed to a 20-year, 100% fee-based, gas gathering and processing agreement. While Chesapeake could have earned a little more by keeping these assets in house, it sees a better opportunity to reinvest the proceeds from the deal into the core of its core acreage.
To sum everything up, Chesapeake's divestitures this year have jettisoned very little actual oil and gas production. Instead, the company has been paring off its excess acreage and assets to save the company hundreds of millions in future capex. The company can take the money it received in the deals, and the funds that would have been required to fully develop those assets, and plow that money into its core assets. There's little doubt that Chesapeake could have gotten more money for these assets if it didn't need the cash, but these deals do allow the company to keep its most prized assets while making the best of its situation.
