Chesapeake Asset Sale Raises Another $2.6B

After the trading markets in the U.S. closed yesterday, Chesapeake Energy announced three deals that will convert some of their considerable assets into $2.6 billion of cash to help fund development and cut down on debt. In a climate of continuing low commodity natural gas prices, Chesapeake has adopted a strategy of selling “non-strategic” assets to keep the momentum going.

Yesterday’s announcement included:

  1. Sale of subsidiary CHK Cleveland Tonkawa to a group of investors including GSO Capital Partners (part of the Blackstone Group), TPG Capital, Magnetar Capital and EIG Global Energy Partners. CHK C-T has the rights to 245,000 acres in the Cleveland and Tonkawa basins, which contain tight sand oil and gas liquids, and 1,000 new wells that will be drilled on the acreage. That deal netted Chesapeake $1.25 billion.
  2. Sale of a 10-year production agreement in the Granite Wash play in the Anadarko Basin (Oklahoma) to an affiliate of Morgan Stanley for $745 million. The deal, called a volumetric production payment (VPP), gives Chesapeake cash up front for future oil and gas production. According to the Chesapeake press release, this is the tenth such VPP deal since 2007, netting Chesapeake $6.4 billion in up-front cash.
  3. Sale of 58,400 leased acres in the Texoma Woodford play in Oklahoma to XTO Energy, a subsidiary of Exxon Mobil, for $590 million.

The Chesapeake press release announcing the deals:

Chesapeake Energy Corporation today announced three oil and gas asset monetization transactions for total proceeds of approximately $2.6 billion in cash.

Chesapeake has completed the sale of preferred shares of a newly formed unrestricted, non-guarantor consolidated subsidiary, CHK Cleveland Tonkawa, L.L.C. (CHK C-T), and a 3.75% overriding royalty interest in the first 1,000 new net wells to be drilled on CHK C-T leasehold and certain wells contributed at closing for proceeds of $1.25 billion. The purchasing investment group was led by GSO Capital Partners LP, an affiliate of the Blackstone Group, and included TPG Capital, Magnetar Capital and EIG Global Energy Partners. CHK C-T owns approximately 245,000 net leasehold acres in the Cleveland and Tonkawa unconventional liquids-rich tight sand plays in Roger Mills and Ellis counties, Oklahoma. Chesapeake has retained all the common equity interests in CHK C-T.

The holders of CHK C-T preferred shares are entitled to receive an initial annual distribution of 6%, payable quarterly. Chesapeake has retained an option exercisable prior to March 31, 2019 to repurchase the preferred shares for cash in whole or in part at any time, at a valuation equal to the greater of a 9% internal rate of return or a return on investment of 1.35x.

Chesapeake has also completed the sale of a 10-year volumetric production payment (VPP) to an affiliate of Morgan Stanley for proceeds of approximately $745 million, or approximately $4.68 per thousand cubic feet of natural gas equivalent (mcfe), for certain producing assets in its Anadarko Basin Granite Wash play. The transaction included approximately 160 billion cubic feet of natural gas equivalent (bcfe) of proved reserves and current net production of an estimated 125 million cubic feet of natural gas equivalent (mmcfe) per day. Chesapeake has retained drilling rights on the properties above and below currently producing intervals and outside of existing producing wellbores. Including this transaction, the company has completed 10 VPP transactions since December 2007 and, in doing so, has sold approximately 1.37 trillion cubic feet of natural gas equivalent (tcfe) of proved reserves for combined proceeds of approximately $6.4 billion, or approximately $4.65 per mcfe, which is approximately 300% more than the company’s current drilling and completion cost per mcfe.

Finally, Chesapeake recently signed a purchase and sale agreement covering approximately 58,400 net acres of leasehold in the Texoma Woodford play in Bryan, Carter, Johnston and Marshall counties in Oklahoma to XTO Energy Inc., a subsidiary of Exxon Mobil Corporation (NYSE:XOM), for approximately $590 million in cash before certain deduction and standard closing adjustments. The properties include approximately 25 mmcfe per day of current net production. The transaction is expected to close on April 30, 2012.

Management Comment

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented, “We are pleased to announce the completion of two value-creating asset monetization transactions in the 2012 first quarter and also announce our agreement to sell our Texoma Woodford assets to XTO. The Texoma Woodford play is non-strategic to Chesapeake and we are happy to unlock the value in these assets for our shareholders. We plan to monetize other non-strategic assets during 2012, including our assets in the East Texas Woodbine play where we own approximately 50,000 net acres of leasehold. We look forward to the completion of our Texoma Woodford transaction and other planned 2012 asset monetization transactions in the months ahead for proceeds of approximately $8-10 billion.”*

*Chesapeake Energy (Apr 9, 2012) – Chesapeake Energy Corporation Announces Three Oil and Gas Asset Monetization Transactions for Proceeds of $2.6 Billion