Chesapeake Energy Corp. last week said it is considering the outright sale of its Permian Basin portfolio, as well as other sales and joint venture (JV) partnerships, which together could reap $10-12 billion.
The Oklahoma City-based producer, which has been criticized for adding to debt through its voracious appetite for onshore properties, faces a funding gap this year that some analysts have pegged at $4-6 billion. Last month Chesapeake shut in 0.5 Bcf/d and cut dry gas spending for 2012 by 70% (see NGI, Jan. 30). As much as 1 Bcf/d could be curtailed “if conditions warrant.”
Reaction to the announcement was mildly positive. Bank of America said it would maintain a “buy” on the second largest natural gas producer in the United States. The decision to exit the Permian Basin “shows management’s willingness to monetize asset value in what would be the second major asset sale after Fayetteville [shale] in early 2011.”
Moody’s Investor Service changed Chesapeake’s rating outlook to “stable” from “positive.” The asset sales to come later this year “have the potential to reduce Chesapeake’s adjusted debt and leverage metrics,” said analyst Peter Speer. “But given the inherent uncertainty regarding the execution and ultimate proceeds received from these future transactions combined with the potential for further declines in natural gas prices we have changed the outlook to stable.”
“This move is clearly in response to pressures exerted by weak natural gas prices, its high leverage and high spending plans,” wrote RBC Capital Markets analyst Scott Hanold. “Our model indicates that Chesapeake has a $4 billion free cash flow deficit to fund during 2012.” Analysts with Simmons & Company International last month said the company had to complete some sales and JVs because of an expected $6 billion funding gap this year. However, they noted that Chesapeake’s track record in executing JVs “has been best in class and should not be taken lightly.”
A Permian Basin JV had been contemplated but Chesapeake received “industry inquiries about a complete exit” from the basin, which it may consider “if it receives a compelling offer.” The Permian Basin portfolio represents about 5% of Chesapeake’s total 2011 net proved reserves and current production.
The company has an estimated 830,000 net acres in the Permian Basin of West Texas and southeastern New Mexico, including the Bone Spring, Avalon, Wolfcamp and Wolfberry plays. Proved reserves total 332 Bcfe and unrisked proved reserves are estimated at 8,800 Bcfe. At the end of September Chesapeake had 13 operated rigs in the leasehold; production was averaging around 120 MMcfe/d.
The decision to possibly sell a chunk of its portfolio is part of Chesapeake’s strategy to “fully fund” anticipated capital spending this year and provide a liquidity cushion in 2013. “Rapidly increasing liquids production” is expected to enable the company in 2014 “to reach equilibrium between its cash flow from operations and its planned drilling and completion capital expenditures.”
In the next two months $2 billion is expected from two separate transactions. A volumetric production payment is to be completed on the company’s Granite Wash assets in the Texas Panhandle. Chesapeake also should complete transactions to form a new subsidiary to hold its Cleveland and Tonkawa assets, which are in Oklahoma’s Ellis and Roger Mills counties. The company earlier formed a subsidiary to hold its Utica Shale properties. In addition, Chesapeake still is pursuing a JV for its Mississippi Lime leasehold, where it has 1.8 million net acres.
A Mississippi Lime JV, a Permian Basin transaction and various other minor asset sales “could result in cash proceeds to Chesapeake of approximately $6-8 billion in 2012.” The transactions are scheduled to be completed by the end of September. Another $2 billion is to be recouped from the sale of some midstream properties, service company assets and miscellaneous investments, which would bring total monetization cash proceeds in 2012 to $10-12 billion.
“These proceeds are substantially in excess of the difference between the company’s expected cash flow from operations and its planned capital expenditures and would allow the company to achieve its previously announced debt reduction goals while providing additional financial strength during this current period of low U.S. natural gas prices,” Chesapeake stated.
As part of its ongoing “liability management strategy,” the company said it also plans to issue $1 billion of senior notes through a public offering that would be due in 2019. The proceeds from the offering would be used to refinance or partially refinance other shorter dated maturities later in the year and for general corporate purposes.
Chesapeake affirmed its goal to reduce long-term debt to $9.5 billion or less by the end of this year “and anticipates achieving investment grade metrics of net long-term debt per Mcfe proved reserves of less than 50 cents and net long-term debt to total capitalization of less than 35% by year-end 2012.”
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