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Chesapeake Energy Corporation Unloads Marcellus and Utica Shale Acreage

By Matthew DiLallo – Oct 16, 2014 at 3:03PM

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Chesapeake Energy sells Marcellus and Utica shale acreage to Southwestern Energy for $5.375 billion.

Source: Chesapeake Energy.

Chesapeake Energy (CHKA.Q) announced today that it is selling acreage in the Marcellus and Utica shale plays to Southwestern Energy (SWN 0.88%) for $5.375 billion. The sale covers 413,000 net acres and about 1,500 wells in West Virginia and southern Pennsylvania. More important, it unlocks the value of acreage that wasn't core to Chesapeake Energy's future growth plans.

What the deal means for Chesapeake Energy
As the following slide from a recent investor presentation illustrates, Chesapeake thought its acreage in the southern Marcellus shale and the Utica shale plays was worth $4 billion to $8 billion based on the market valuation of some of its peers.

Source: Chesapeake Energy Investor Presentation.

While the company talked about spinning off the asset to unlock this value, a straight sale to Southwestern Energy is a much quicker way to realize the value of this acreage. It provides the company with a boatload of cash that it can use to fuel even more shareholder value. The deal also dramatically improves a balance sheet that was already heading in the right direction. It will be interesting to see how Chesapeake Energy uses its new cash hoard, as it now has the capacity to make a large acquisition, buy back shares, or accelerate growth.

The company expects the sale will have no impact on its growth because these assets were not a core part of its growth plans. This is why the company still expects to deliver a 7%-10% production increase next year even as it maintains a disciplined capital program.

What the deal means for Southwestern Energy
While Chesapeake Energy didn't expect the asset to be a big growth driver, the same can't be said for the buyer. Southwestern Energy expects to steadily grow its rig count from four to six rigs next year up to 11 rigs by 2017. It expects it can sustain that 11-rig pace for the next two decades. That will enable the company to continue to rapidly boost natural gas production.

As the following slide shows, Southwestern Energy has quietly become the fourth-largest natural gas producer in the lower 48 states.

Source: Southwestern Energy Investor Presentation.

The addition of the southern Marcellus and the Utica shales to its portfolio gives Southwestern Energy another growth pillar to build upon as it seeks to continue ascending the natural gas leadership ranks. While the rest of the industry has turned its attention to oil, Southwestern hasn't backed away from natural gas. This focus could enable the company to one day grow into the nation's top producer.

This is an interesting deal for a number of reasons, including its transformative value for both companies. It fills Chesapeake Energy's coffers with more cash than the company has had in years, along with added financial flexibility. Meanwhile, it gives Southwestern Energy another major growth asset that will keep the company busy for the next two decades. 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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