Chesapeake Energy Corporation (NYSE:CHK)’s announcement of a $1 billion print for the long-awaited sell-down of their Eagle Ford Shale footprint is a key step toward the company’s stated $4 billion asset sale target. While it represents yet another underwhelming sale print, the takeaway from this news is that the company is executing toward its 2013 asset sale target with minimal cannibalization of its production stream.
Profitability Weighed Down by Low NG Prices, High Drilling Costs
Over the past two years, Chesapeake Energy Corporation (NYSE:CHK)’s profitability has been weighed down by low natural gas prices and high drilling costs. In 2012, the firm posted a sizable operating loss of around $1.7 billion. However, it has been taking steps to get back on track by concentrating on the core portions of its most important plays, boosting its liquids production, and focusing on improving drilling efficiencies. During the first quarter, Chesapeake saw marginal improvement, posting an operating profit of around $217 million.
Eagle Ford Assets Appears Quite Inexpensive To Chesapeake
Chesapeake Energy Corporation (NYSE:CHK) announced today that is has inked a deal with EXCO Resources Inc (NYSE:XCO) for portions of its holdings in the Northern Eagle Ford and Haynesville shale plays. Total aggregate proceeds will be ~$1.0bn with effective dates of April 1st and January 1st, respectively. EXCO disclosed the sales price breakout as $680mm for the Eagle Ford package – 55k net acres, 6.1 MBOE/d and 300 remaining drilling locations – and $320mm for the Haynesville assets – 9.6k net acres, 114 MMcf/d and 55 identified drilling locations.
Thus, Citi cut on the valuation would be for the Eagle Ford assets – $55k/flowing BOE and ~$8,800/acre for the undrilled leasehold (implies 130-acre spacing over the entire position), and for the Haynesville assets – $16k/flowing BOE and ~$7k/acre for the undrilled leasehold (implies 40-acre spacing over the entire position).
While the Haynesville package entails interests in wells EXCO Resources Inc (NYSE:XCO) already operates and direct offset locations wherein the price tag appears reasonable, the price paid for the Eagle Ford assets appears quite inexpensive relative to deals struck on other recent Eagle Ford transactions.
Citi: No Significant Producing Property Sales This Year
The company’s 2013 production and capex guidance already incorporated ~$4.0bn of producing property asset sales this year and today’s deal brings the total to ~$3.6bn. Thus, there is no change to Chesapeake Energy Corporation (NYSE:CHK)’s full-year guidance although guidance would now have to be adjusted for any future sales. Today’s transaction entails nearly 4 percent of Chesapeake’s total current production.
Citi full-year cash flow projection remains at ~$4.9bn, leaving a funding gap of ~$2.4bn. Consequently, they project that the company would need to receive another ~$2.2bn from asset sales to meet its debt target of $9.5bn (~$12.2bn at YE’12) which they believe is unlikely to occur this year . Citigroup Inc. (NYSE:C) does not believe there will be any further significant producing property sales this year although guidance still incorporates some small non-E&P divestitures.