Chesapeake Energy Corp. said Monday it plans to sell all of its Fayetteville Shale assets, as well as its equity investments in Frac Tech Holdings LLC and privately held Chaparral Energy Inc. Pre-tax proceeds could exceed $5 billion, the Oklahoma City-based company said.

The company’s shares blew past their 52-week high of $31.43 in early trading and were up about 4.5% at midday Monday at $31.46; however, the rally was flagging in the early afternoon, with shares trading around $31.12 after getting as high as $32.17 earlier in the day.

In the Fayetteville Shale Chesapeake is the second-largest producer of natural gas with net production of approximately 415 MMcfe/d and owns approximately 487,000 net acres of leasehold, according to the company. Southwestern Energy Co. is the largest leaseholder in the Fayetteville, followed by ExxonMobil Corp., which achieved the position following the sale by Petrohawk Energy Corp. of its Fayetteville gas assets to ExxonMobil unit XTO Energy Inc. (see Shale Daily, Dec. 27, 2010).

While Southwestern could be a buyer of the Chesapeake assets, so could ExxonMobil or another major oil company or international company, analysts said.

According to September figures from a Chesapeake investor meeting last year, 14% of the company’s net gas production of 2.9 Bcf/d was coming from the Fayetteville, placing it behind the Haynesville (27%), Barnett (21%), Anadarko (15%) and other category (15%) and ahead of the Marcellus Shale (6%) and the Permian Basin/Rockies (2%).

Chesapeake’s drilling and completion costs in the Fayetteville were about $3.33 million per well last year, compared with $2.94 million in the Barnett Shale and $8.34 million in the Haynesville Shale, according to company figures. Among the Haynesville, Marcellus, Barnett and Fayetteville shales, Chesapeake’s Fayetteville wells have the lowest initial production rates and the lowest estimated ultimate recoveries, according to the company.

For a 10% rate of return in the Marcellus Chesapeake needs a gas price of $2.45/Mcfe, while in the Fayetteville the price needed is $4.70/Mcfe. In the Haynesville and Barnett the corresponding figures are $4.25/Mcfe and $5.05/Mcfe, respectively.

Chesapeake owns 25.8% of Frac Tech and 20% of Chaparral. The company is a customer of Frac Tech along with Petrohawk, XTO and Range Resources Corp. In October Marcus Rowland, formerly Chesapeake CFO, became president of Frac Tech (see Shale Daily, Oct. 14), and the company filed for an initial public offering in December (see Shale Daily, Dec. 17, 2010).

Chesapeake said it plans to use the net proceeds from these sales and its previously announced Niobrara Shale joint venture (see Daily GPI, Feb. 3) to retire $2-3 billion of its shorter-dated senior notes and to also reduce borrowings under its revolving bank credit facility.

In January Chesapeake said it would cut long-term debt by 25% over the next two years by reducing leasehold spending and through asset monetizations, which would reduce the company’s planned two-year production growth rate to 25% from its previously planned 30-40% growth rate (see Shale Daily, Jan. 7). The company said it does not intend to issue any common or preferred shares to cut debt. The most recent planned sales are part of this 2011-2012 strategic and financial “25/25 Plan.”

“We have received strong positive feedback from a number of our investors with respect to the announcement of our 25/25 Plan in early January and last week’s announcement of our $1.3 billion Niobrara joint venture with an affiliate of CNOOC Ltd. We believe the three proposed asset sales announced today and the Niobrara joint venture are all likely to be completed in the first half of 2011 and will provide us with strong momentum into the second half of 2011 as we move forward in executing our plan,” said CEO Aubrey McClendon.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) called the sales a “big step” toward meeting the goals of the plan and upgraded the company’s stock to “buy,” noting that Chesapeake shares are up 37% over the last three months.

“Clearly the stock has caught a bid,” TPH said in a Monday morning note. “Today’s announcement…should, in our minds, have investors pressing the bid harder. The market has already started to take note of an improving story backed up by high-quality assets…We still see further activity which could place [Chesapeake] in an even better position going forward, which should place the company clearly at the top of 2012 [exploration and production] stories to invest in…”

In December activist investor Carl Icahn had become Chesapeake’s second largest shareholder (see Shale Daily, Dec. 22, 2010) amid criticism by some analysts that the company’s spending and accounting were out of hand (see Shale Daily, Dec. 6, 2010).

Standard & Poor’s Ratings Service placed its ratings on Chesapeake on “watch” with positive implications because of the potential sales and the use of their proceeds for debt reduction.