Chesapeake's (NYSE: CHK) Eagle Ford Sale

Brian Hicks

Written By Brian Hicks

Posted July 5, 2013

Chesapeake Energy (NYSE: CHK) could be the phoenix rising from the ashes.

Chesapeake recently announced sales of assets in the Eagle Ford and Haynesville shales of Texas. Together, the assets amount to $1 billion and will be transferred to Exco Resources Inc. (NYSE: XCO).

chesapeake energyAccording to an official press release, Exco purchased Eagle Ford assets for $680 million, amounting to 55,000 net acres and 120 producing wells. These wells produced 6,100 barrels of oil per day as of May. There are also 300 drilling sites and farm-out options covering 147,000 net acres.

In Haynesville, Exco purchased $320 million of natural gas assets, producing 114 million cubic feet of natural gas per day as of May. There are also potential interests covering 5,600 net acres and 11 in-production wells that cover an additional 4,000 net acres. There are 55 drilling prospects included in the purchase.

Overall, Chesapeake plans on selling $4 billion worth of assets to make up for a projected $3.5 billion capital gap this year. So far, the company’s year-to-date asset sales are $3.6 billion, according to Robert Douglas Lawler, new CEO of Chesapeake.

He also hopes “asset sales later this year may reduce long-term debt and further enhance our financial liquidity.” The company has a long-term debt pile of $13.4 billion. The overall goal is to fund more expenditure capital.

Chesapeake Woes

Chesapeake is an energy company that primarily delves in natural gas production, second only to Exxon Mobil (NYSE: XOM) in U.S. production. But operations have been slower ever since prices plummeted and production costs skyrocketed.

Much of the problem can also be traced to co-founder and former CEO Aubrey McClendon’s land-grabbing days. The shale land itself wasn’t the problem, but it was too much land on a short-term basis – forcing the company to pay unnecessary loan interest on land that would not be developed for the next 30 years.

Within a time frame of five years, Chesapeake engaged in approximately 600,000 lease contracts over 9 million acres of shale territory and spent an additional $9 billion in bonuses to landowners.

All of these purchases were backed up with loans and credit, but the company’s spending outweighed revenue.

Given this history, it is not surprising Lawler chose to sell off Texas assets, but the company will be losing out on precious Eagle Ford territory, especially since Chesapeake was known as one of the top crude oil producers in Texas, according to information from the Texas Railroad Commission. When a shareholders’ revolt ousted McClendon, board members decided to buckle down on crude as a way of making up for profit losses.

But selling off crucial assets in the Eagle Ford indicates Lawler plans to get the company’s fiscal house in order before anything else. Going forward, it will be interesting to see which direction Chesapeake decides to take.

Will the company continue to focus on crude exploration or natural gas? Or will the company diversify more in the future?

Chesapeake recently sold a 50% joint venture to Sinopec International (NYSE: SHI) in northern Oklahoma Mississippi Lime territory, covering oil and natural gas plays that span 850,000 acres.

Chesapeake may have to wait a while longer for natural gas. Even though prices are slowly creeping up, it will be a while before Chesapeake can once again relish in its favored commodity unless it enters the liquefied natural gas exporting arena, which is hard to do considering the government’s unofficial cap on LNG.

The best bet Chesapeake has right now is crude; it is higher than natural gas, and the company has a chance to play a greater role in the U.S. crude bonanza.


Will Chesapeake Make It?

According to the company’s first-quarter 2013 report, Chesapeake’s adjusted EBITDA rose to a steady 35%. Operating cash flow increased by 29% to $1.176 billion over the last few years.

The company recorded a 9% increase in natural gas production from the first quarter of 2012 and a 1% increase from the 2012 fourth quarter. Natural gas production amounted to 3 billion cubic feet per day. Oil production rose 56% year-over-year to a steady pace of 103,000 bpd. Two percent growth occurred in the northern Marcellus play.

Steven Nixon, acting CEO at the time, cited the Eagle Ford and Anadarko basin territories as reasons for better performance.

Net capital for unproven territory reached $54 million, which is in line with the company’s $400 million budget for 2013.

The company has plans to maximize output in existing fields by spending 80% capital on drilling and completion activities. This is a contrast from 50% capital spending on existing fields over the last few years.

All capital expenditures have either fallen below or in line with established budget parameters in the first quarter report for 2013.

Chesapeake is on solid ground, but it remains to be seen if the company can keep up the momentum. With a new CEO at the helm, Chesapeake appears serious about utilizing its current assets while becoming more reserved in its spending and acquisitions, a far leap from McClendon’s days of taking unnecessary spending risks.


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