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Mississippian Lime Oil and Gas

Chinese Company to Purchase Chesapeake (NYSE: CHK) Assets

Written by Swagato Chakravorty
Posted February 26, 2013 at 4:26PM

Sinopec (NYSE: SNP), otherwise known as China Petroleum and Chemical Corp., is set to buy half of Chesapeake Energy Corp.’s (NYSE: CHK) Mississippi Lime oil and gas assets (Oklahoma) in a deal worth $1.02 billion, hoping to gain a firmer foothold in the ever-expanding shale gas sector in North America.

As has been reported widely by now, there’s an ongoing shale boom in the U.S. and Canada; thanks to the controversial process known as fracking, shale field output has shot up all over the place, to the point where the U.S. now has a glut of natural gas production and excess gas needs to be flared (burned off).

China, meanwhile, is estimated to possess the largest shale reserves in the world. That’s right—the Chinese shale boom, if and when that occurs, could be even grander than what’s happening across North America. Naturally, the Chinese are eager to expand their understanding of shale operations.

There have been several China-North America deals recently. China’s CNOOC Ltd. (NYSE: CEO) recently bought Canada’s Nexen Inc. (TSX: NXY) for $15.1 billion, and Pioneer Natural Resources Co. (NYSE: PXD) is set to sell assets in its Texan shale field to Sinochem Group for $1.7 billion.

And now, Sinopec, which is the largest oil refiner in all of Asia, will purchase half of Chesapeake's 850,000 acres of net oil and natural gas assets in the Mississippi Lime shale reserve.

Production from the Lime region had risen 208 percent to nearly 32,500 barrels of oil equivalent per day in Q4, per the company’s reports. Of the output, 46 percent is natural gas, 45 percent is oil, with the rest comprised of natural gas fluids. If anything, this deal will certainly help the company reduce its $12 billion (as of end-December) debt.

Just last year, Chesapeake made $12 billion in asset sales, Reuters reports; the company has a target of $4-7 billion in asset sales through this year. Last December, it said that Access Midstream Partners LP (NYSE: ACMP) would be purchasing most of Chesapeake’s natural gas processing and harvesting assets in a $2.16 billion deal.

Sinopec has a good deal, though. Last month, it reached an agreement with Devon Energy Corp. (NYSE: DVN) to purchase a third of that company’s interest in five developing fields for $2.2 billion, per Reuters.

As for this Chesapeake deal, it appears Sinopec actually obtained its stake for less than one-third of estimated value, reports Bloomberg.

Back in July, Chesapeake had valued the asset at $7-8,000 per acre. Now, however, the deal price indicates per-acre pricing of just $2,400. Bloomberg quotes MorningStar analyst Mark Hanson:

“This is the first joint-venture deal Chesapeake has ever done without a drilling carry,” Hanson said in a telephone interview yesterday. For Chesapeake, “this looks pretty underwhelming,” he said.

Chesapeake isn’t doing that well at all—over the past year it has lost 24 percent of its market value, and last week saw the company post its largest yearly loss since 2009.

Over the past year, Chesapeake faced a serious liquidity problem and major issues with internal governance. Chief Executive Aubrey McClendon is to leave his post beginning April this year. This is supposedly unrelated to an internal company inquiry last year into McClendon’s use of stakes in Chesapeake-owned wells to secure in excess of $800 million in personal loans.

The asset sales mentioned earlier are part of Chesapeake’s attempt to secure its position by cutting down on spending, paying down debt, and increasing production efficiencies.

This Sinopec deal marks a significant win for the company over the earlier SandRidge Energy Inc. deals. In those 2011 deals, SandRidge received $4,425 and $2,750 per acre in two successive deals. Neither of those deals included any producing wells, unlike Chesapeake's assets, but the price was higher.

The Chesapeake acreage that Sinopec will soon own has already been extensively explored, drilled, and is producing in healthy quantities. Bloomberg reports:

“While Chesapeake has many quality assets, Chinese oil companies care more about their drilling and shale-fracking technology,” Laban Yu, a Hong Kong-based analyst at Jefferies Group Inc. (JEF), said in a telephone interview. “The reason Chinese oil companies have gone after Chesapeake in the past year was also because they wanted to apply the technology to tap the world’s No. 1 shale gas reserves in China.”

Chesapeake stock dropped 6.8 percent on Monday following the announcement, reaching $19.11 in New York. Sinopec was up 0.5 percent in Hong Kong, at HK$8.80. The Chinese company has risen about 1.2 percent over the year.

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