Chesapeake Energy Corp. (CHK) has agreed to sell a stake in its
Mississippi Lime play to Sinopec International Petroleum Exploration
& Production Corp. for $1.02 billion in cash as the natural gas
company aims to focus on developing its profitable liquids-rich plays.
The deal fulfills a nearly yearlong pledge by Chesapeake to
sell at least a stake in the northern Oklahoma oil and gas field to help
it bridge a $4 billion cash shortfall this year. Chesapeake, the
second-largest natural gas producer after Exxon
Mobil Corp. (XOM), is still reeling from a collapse in U.S. natural gas
prices and attempting an expensive shift to more profitable oil
drilling.
It would also increases state-owned Chinese oil and gas
producers' rapidly expanding foothold in the North American oil patch.
Sinopec entered a $2.5 billion joint venture with Devon Energy Corp.
(DVN) in January 2012 to drill in oil and gas fields in the U.S.
Midwest, while Cnooc Ltd. (CEO), which just concluded a $15 billion
takeover of Canada's Nexen Energy in the largest overseas acquisition by
a Chinese state-owned energy company, and in 2010 and 2011 bought
stakes in Chesapeake Energy Corp.'s oil-rich shale fields in south
Texas, as well as fields in Colorado and Wyoming.
"We are excited to announce the execution of our Mississippi
Lime joint venture with Sinopec, which moves us further along in
achieving our asset sales goals and secures an excellent partner to
share the capital costs required to actively develop this very large,
liquids-rich resource play," Chesapeake's Chief Operating Officer Steven
C. Dixon said.
Chesapeake and other natural gas producers have been hurt by a
natural-gas glut resulting from their use of hydraulic fracturing, or
fracking, to produce gas from shale formations. The resulting production
surge caused prices to collapse and their revenue to shrink, forcing
Chesapeake to sell more than $10 billion in assets last year to make
ends meet.
Chesapeake put the Mississippi Lime up for sale in 2012. The
area is an increasing target for companies using fracking techniques in
search of oil, but so far there has been only moderate success.
That may have contributed to what at first glance looks like a
heavily discounted price for the acreage, said Hsulin Peng, an analyst
at Robert W. Baird & Co.
The "headline deal metrics appear to favor Sinopec...the
transaction implies very little value for unproved acreage," Mr. Peng
said.
Upon close of the deal, expected in the second quarter,
Sinopec would receive a 50% undivided interest in 850,000 of
Chesapeake's net oil and natural gas leasehold acres in the Mississippi
Lime.
Chesapeake will get 93% of the acquisition price when the deal
closes. Payment of the remainder will depend on certain customary title
contingencies.
All future exploration and development costs in the joint
venture will be shared proportionately between the two companies with no
drilling carries involved.
As the operator of the project, Chesapeake will conduct all
leasing, drilling, completion, operations and marketing activities for
the joint venture.
Production from the assets, including Mississippi Lime and
other formations, net to Chesapeake's interest and prior to Sinopec's
purchase, averaged about 34,000 barrels of oil equivalent per day in the
fourth quarter.
Earlier this month, Chesapeake said its fourth-quarter
earnings fell 36% as the natural-gas company was hurt by debt-buyback
expenses a natural gas prices 20% lower than at the end of 2011.
Shares fell 1.8% to $20.13 in recent trading. The stock has risen 23% so far this year through Friday's close.