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Chesapeake Energy may benefit from Utica lease sales

By Bob Downing Published: April 15, 2013

From Heather Ingrassia of the Seeking Alpha blog:

On Friday, April 12, Chesapeake Energy Corp. (CHK) avoided being hit with what had the potential to be some very heavy fines related to a drilling accident that occurred in Wyoming last year. In my opinion, and although the state agency responsible for overseeing oil and gas drilling noted "accidents will happen", this incident saved Chesapeake substantial amounts of money, which essentially brings me to the gist of this article.

In the wake of Chesapeake's favorable ruling, I wanted to examine two of the company's recently announced potential asset sales, as these transactions could contribute nicely to the company's goal of raising between $4 billion and $7 billion in cash throughout the course of 2013.

Shares of CHK, which currently possess a market cap of $12.32 billion, a forward P/E ratio of 10.25, and a yield of 1.78% ($0.35) settled at $19.68/share on Friday. One of the things to point out for growth investors is the fact that shares of CHK are actually 18.55% higher since January 1st of this year.

CHK Chart

CHK data by YCharts

Utica Shale (Ohio) Sale: On April 9th it was announced that Chesapeake Energy would be putting up 94,000 of the 1,000,000 net acres of the Utica shale formation for sale. According to Ben Lefebvre, "The land which includes three wells (two of which are operated by Chesapeake) is being sold in an effort for Chesapeake to focus on its other, more valuable, Utica-based holdings". If and when Chesapeake does find a suitor, the company may be able to generate a pretty penny for the acreage as Tyler Crowe of the Motley Fool recently noted, "While the assets for sale are a more speculative play that has yet to be fully assessed, assets in the Utica could be a hot commodity. With a stronger liquids profile than its neighbor the Marcellus, midstream companies are investing big money to bring pipeline online in the region to increase takeaway capacity". The good news is the fact that acreage in Utica tends to carry a premium to the acreage in Marcellus due in part to the fact it possesses a much better liquids profile which should benefit Chesapeake.

Gastar Agreement: On April 1st it was announced that Gastar Exploration, Ltd. (GST) had entered into a definitive agreement to acquire proven reserves and undeveloped leasehold interests in Kingfisher and Canadian counties of Oklahoma from Chesapeake Energy Corporation, repurchase Chesapeake's common shares of the Company and settle all litigation for $1 million. Although smaller in scope than most of Chesapeake's previous asset-shedding transactions, the agreement with Gastar accomplishes two things. First, is the fact the settlement resolves the legal wrangling both companies were engaged in and as a result Chesapeake walks away with $85 million of the potential $130 million they were suing for. Second, is the fact Chesapeake wipes it hands of acreage, that although producing, may not be producing as much as Chesapeake had once hoped, and therefore was worth much more to Gastar in the long run.

Conclusion: I strongly believe Chesapeake Energy Corp. has the right idea in terms of continued asset sales, and over the course of the next 6-12 months, I think the company will not only reach its goal of raising between $4 billion and $7 billion in cash, but will continue to shed non-beneficial assets in order to do so.

 
 

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