Management of the rapidly growing Oklahoma City-based company has hired the energy consulting firm of Jefferies Randall & Dewey to help market stakes it currently holds in properties in Kentucky and West Virginia. Those properties include about 1.5% of Chesapeake's total reserves and production, and they're expected to fetch about $550 million for the company. They will be the first to go in a planned program that the company has put in place to raise about $2 billion through property sales each six months during the next two years.
At the same time, the company will reduce its current production by about 6%, cut drilling expenditures by about 10% for the next two years, and divest its midstream assets into a master limited partnership or other structure. All in all, Chesapeake expects to monetize about $3.5 billion in assets that it believes aren't reflected in its current market valuation.
In the less than two decades since it was founded, Chesapeake has blown past industry leader ExxonMobil
But in the past six weeks, with gas prices sliding and a generalized credit tightening fueling concerns about the company's ability to fund all of its programs, its share price has dropped about 10% to Wednesday's close at $33.89. Tuesday's announced program appears to be a sensible way of dealing with recently changed circumstances.
For instance, the planned property sales clearly involve areas of less importance and promise than, for instance, the Barnett or the Ark-La-Tex, and it's not the role of any producing company to become property pack rats. On the drilling front, I've long been amazed at the scope of Chesapeake's program, so a slight pullback actually could be beneficial. And I won't be saddened to see the midstream separated off. The company's strength has been in finding gas in a concentrated manner, and there seems little to be lost from the spinoff.
All in all, these announced steps seem reflective of a capable and decisive management team that realizes that changing times frequently demand altered approaches.
For related Foolishness:
- Chesapeake Produces, and Then Some
- Fast Pitch: Chesapeake Energy
- Chesapeake Energy vs. Sasol: Chesapeake Energy