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Chesapeake Jettisons Permian, Midstream for $6.9B Pay Day

Chesapeake Energy Corp. last week pulled the trigger on multiple agreements to sell most of its Permian Basin properties to Royal Dutch Shell plc and Chevron Corp., clinched transactions with Global Infrastructure Partners (GIP) for the rest of its midstream assets and unloaded other properties that together give the cash-strapped producer total net proceeds of $6.9 billion.

The sale allows Chesapeake to "fully repay" a $4 billion term loan obtained in May that was being used to help the company meet its 2012 debt obligations (see NGI, May 21).

"The net proceeds of approximately $6.9 billion...are in addition to the $4.7 billion of sales previously closed in the 2012 first half and will bring our 2012 year-to-date sales to $11.6 billion, or approximately 85% of our full-year goal of $13-14 billion, which we expect to achieve by year end," said CEO Aubrey McClendon. The transactions "are significant steps in the transformation of our company's asset base to a more balanced portfolio among oil, natural gas liquids and natural gas resources and production by focusing on developing and harvesting the value embedded in the 10 core plays in which Chesapeake has built a No. 1 or No. 2 position."

None of the sales announced last week were a surprise; Chesapeake had said last month it would sell the Permian assets in separate packages and that it was negotiating with GIP to sell the bulk of its midstream properties (see NGI, Aug. 13). However, the Permian sales agreements to two Big Oil companies were somewhat of a surprise -- many analysts had thought Chesapeake was negotiating with foreign buyers. Securing deals with operators used to dealing with U.S. regulators likely was considered a bonus for Chesapeake, which has been under the gun to get some deals done.

Sales agreements in the Permian are going to net the company $3.3 billion -- significantly less than the $4-6 billion that some analysts had touted, although Chesapeake plans to keep about 470,000 net acres of undeveloped leasehold in the Midland Basin of the Permian that it still could sell or develop. The Permian sales agreements were "good, not great," said Wunderlich Securities' Jason Wangler. Chesapeake still needs to sell another $3 billion or so assets this year to reach its goals, but that goal now appears to be on track.

The Permian Basin assets being sold produced about 21,000 b/d of liquids and 90 MMcf/d of natural gas in 2Q2012, or around 5.7% of Chesapeake's production in the period. According to Canaccord Genuity's John Gerdes, the prices paid for the Permian assets "imply a valuation of $1,000/acre and a $60-65/boe/d production rate multiple."

SWEPI LP, a Shell subsidiary, bought property in the southern Delaware Basin portion of the Permian for an estimated $1.935 billion. It's Shell's first foray into the reemerging Permian -- and it's a big one. The acquisition properties cover 618,000 net acres that currently produce 26,000 boe/d.

The northern Delaware Basin properties are being sold to Chevron U.S.A. Inc., which already held about 700,000 net acres in the Permian's Avalon Shale and Bone Spring Sands. Neither Chevron nor Chesapeake provided many details, including how much acreage or what it cost, suffice to say that the leasehold included in the agreement now produces about 7,000 boe/d net.

"This acquisition in a premier emerging play in the Permian Basin grows our significant leasehold position there," said Chevron Vice Chairman George Kirkland. "These early-in-life, liquids-rich unconventional assets have the potential to be significant future contributors to Chevron's robust North American operations."

Chevron's Gary Luquette, who is president of the company's North America Exploration and Production Co., said the investment "gives us significant exposure to stacked Delaware Basin plays where we already enjoy a substantial position. It complements our existing Permian Basin operations and provides us access to additional people and resources to execute our growth strategy there."

Chesapeake also reiterated that it still plans to sell Midland Basin properties to affiliates of Houston-based EnerVest Ltd. under an agreement announced in August. No financial details on the agreement were disclosed. The Permian transactions with Shell, Chevron and EnerVest are set to close within a month. Chesapeake would receive about 87% of the proceeds in cash at closing with the remaining proceeds once property contingencies are completed.

Separately, the midstream assets are being sold in three transactions, with a fourth agreement expected, which when completed would result in combined proceeds of about $3 billion. A letter of intent is in place with long-time midstream partner GIP that cover most of the midstream assets owned by subsidiary Chesapeake Midstream Development LP for expected proceeds of $2.7 billion. GIP initially helped Chesapeake form its midstream unit four years ago, and earlier this summer it agreed to pay $2 billion for Chesapeake Midstream Partners LP (see NGI, June 11).

GIP is buying gathering and processing systems in the Eagle Ford, Utica and Haynesville shales, as well as in the Powder River Basin and Niobrara formation. The transaction includes new market-based gathering and processing agreements covering acreage dedication areas and one new volume commitment covering about 70% of Chesapeake's expected production volumes in the southern portion of the Haynesville Shale area during 2013-2017.

In addition, Chesapeake has sold or entered into sale agreements with two other companies to sell Midcontinent midstream assets and expects to enter into a fourth agreement to sell oil gathering assets in the Eagle Ford Shale for combined proceeds of about $300 million. All of the midstream transactions are set to close over the next few months. When combined with the previous sale to GIP, Chesapeake said its total proceeds from the midstream exit would be about $5 billion.

Finally, in four separate transactions Chesapeake said it also recently sold or has agreements to sell property in the Utica Shale and various other areas for $600 million. Once the transactions are completed Chesapeake would own about 1.3 million net acres in the Utica Shale, in which its cost basis, net of various sales and its joint venture with Total SA, would be $200/net acre, including all drilling carries in its joint venture with the French producer.

Jefferies & Co. Inc. and Goldman, Sachs & Co. served as Chesapeake's financial advisers for the multiple sales. Jefferies analyst Biju Perincheril said the transactions would "alleviate near-term funding" issues for Chesapeake but the funding gap for the company's 2013 capital projects remains a "concern."

The multiple transactions keep the company afloat for now, but Canaccord's Gerdes said "they do not significantly close the gap between the amount Chesapeake needs to spend in the future to maintain its current growth and its projected revenue."

Later this year, Gerdes said, Chesapeake expects to sell another $2 billion worth of properties that may include a joint venture in the Mississippian Lime. Assuming Chesapeake executes the "midpoint of its divestiture plan, net debt should be $8.5 billion, or $1 billion less than year-end '12 target of $9.5 billion." The "liquidity profile improving though it still poses a long-term challenge...In '13 Chesapeake should outspend cash flow by $4 billion-plus and it has established a goal of $4-5 billion in projected asset sales to cover the shortfall.

The team at Tudor, Pickering, Holt & Co. said the asset sales appeared to be "in line" with previous guidance to sell $7 billion in 4Q2012 but the "mix was different than we expected," with lower prices for the exploration assets and higher prices for the midstream. Analysts had expected the Permian assets to fetch $3.9 billion, or around $600,000 more than Chesapeake received, but they noted that the company was able to maintain half a million net acres for future sale. The company also sold its noncore Utica/Woodbine assets for $600 million, which was less than their expectation of $750 million. Still, the midstream monetization was "well ahead of our expectation" at $3 billion versus a forecast of $2 billion.

Sterne Agee analysts reiterated a neutral rating. "We'd advise investors to remain on the sidelines until we learn more" about Chesapeake's earnings and cash flow outlook for the coming year, they said in a note to clients.

However, Morningstar Inc. analyst Mark Hanson said the transactions were "another confirmation never to bet against" Chesapeake and its CEO. "If they say they'll get it done they'll get it done, even if it's a rocky road getting there."

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