Analysts mostly agree that Chesapeake Energy received a relatively low price for the Mississippi Lime acreage it agreed to sell to China’s Sinopec for $1.02 billion. What is less clear though, is whether the price Chesapeake received reflects the company’s position as a distressed seller, or the quality of the assets sold. The Mississippi Lime is a shale play extending from northern Oklahoma into central Kansas.
“From my perspective, the proceeds looked a bit light on a per acre basis as well as per barrel of oil equivalent on a proved reserve basis,” Phil Weiss, Senior Analyst covering energy for Argus Research recently told Breaking Energy in an email.
Chesapeake has experienced headwinds in recent years amid low natural gas prices, a formidable debt load and leadership change born from a perceived conflict of interest involving the company’s co-founder and top executive Aubrey McClendon, who will retire April 1st.
“CHK needs to sell assets to raise cash and cover its capex budget,” said Weiss.
Comparisons are being drawn to a December 2011 deal in which SandRidge Energy sold over 360,000 acres in the Mississippi Lime play for a higher per acre price than CHK is getting from Sinopec. “The deal terms equate to a $2,400/acre price, below the $2,750/acre price that SandRidge received in cash and drilling carries from a JV with Repsol,” brokerage Sterne Agee said in a research note.
The Sterne analysts point out that CHK has drilled over 300 horizontal wells on its Miss Lime acreage and sub-par results could be part of the reason Sinopec paid less than SandRidge for acreage in the same shale play. Although Weiss said when viewed on a production basis the proceeds CHK is receiving from the sale do “look a little better” than on a barrel of oil equivalent proved reserve basis.
It appears to still be fairly early days in the Mississippi Lime though. The recent US oil and gas production boom was facilitated by technological innovation and continually increasing operational efficiencies that few, if any, predicted even five years ago. Given time, companies may figure out better ways to tap Mississippi Lime resources. Additionally, Chinese companies may have sharpened their negotiating skills and gained expertise with regard to evaluating unconventional North American assets as a result of their spending spree in the region over the past few years.
Jefferies & Company advised Chesapeake, with Commercial Law Group PC in Oklahoma City providing legal counsel, a spokesman for Jefferies told Breaking Energy. Goldman Sachs provided additional financial advice to Chesapeake, while Thompson & Knight counseled Sinopec. Chesapeake received tax counsel from Bracewell & Giuliani. Wachtell, Lipton, Rosen & Katz are advising Chesapeake’s board. Finally, Wilmer Cutler Pickering Hale and Dorr are assisting Chesapeake with regulatory issues, according to the source.
It appears Chesapeake needs to sell additional assets in order to shore up its financial position and as a result the company will require further financial and legal advice over the coming months. “While the Mississippi Lime deal represents a big first step, we still believe a number of deals are necessary to fund the remaining $3 billion FCF [free cash flow] deficit we model in 2013, and the $2.9 billion deficit we model in 2014,” Sterne said in its note.