Chesapeake Energy Corp. agreed to sell a stake in an oil and natural-gas field to China's Sinopec for $1 billion, as the U.S. company tries to plug a gap in its cash flow.
Investors punished Chesapeake after it fulfilled a nearly
yearlong quest to sell at least a stake in its Mississippi Lime acres,
which straddle the Oklahoma and Kansas border, saying the company cut
too deep a discount in its asking price. Chesapeake shares declined
6.8%, or $1.39, to $19.11 at 4 p.m. Monday in composite trading on the
New York Stock Exchange.
Chesapeake is still reeling from a collapse in U.S.
natural-gas prices, while it attempts an expensive shift to more
profitable oil drilling. The second-largest natural-gas producer in the
U.S., after Exxon Mobil Corp., is selling assets to address an expected
$4 billion funding shortfall.
The Sinopec deal also would increase state-owned Chinese oil
and gas producers' rapidly expanding foothold in the North American oil
patch. Sinopec, known formally as Sinopec International Petroleum
Exploration & Production Corp., entered a $2.5 billion joint venture
with Devon Energy Corp. in January 2012 to drill in the Mississippi
Lime. Cnooc Ltd., meanwhile, just concluded a $15 billion takeover of
Canada's Nexen Energy in the largest overseas acquisition by a Chinese
state-owned energy company. In 2010 and 2011, Cnooc bought stakes in
Chesapeake's oil-rich shale fields in south Texas, as well as fields in
Colorado and Wyoming.
The latest deal "moves us further along in achieving our
asset-sales goals and secures an excellent partner to share the capital
costs required" to develop this large area, said Chesapeake's chief
operating officer, Steven C. Dixon.
Chesapeake and other natural-gas producers have been hurt by a
glut of the resource that stems from their use of hydraulic fracturing,
or fracking, to unlock gas from shale formations. The resulting
production surge caused prices to collapse to a 10-year low, below $2 a
million British thermal units last April. Chesapeake posted shrinking
revenue and chose to sell more than $10 billion in assets last year to
improve its balance sheet.
Chesapeake Chief Executive Aubrey McClendon said in November
that the company marketed its Mississippi Lime acres for most of 2012 to
Asian energy companies, but added at the time that reaching a potential
deal "became more complicated" as regulators increased scrutiny of
foreign companies trying to invest in U.S. energy assets.
The stamp of approval that the Canadian and U.S. governments
recently gave to Cnooc's $15 billion takeover of Nexen might have calmed
those fears, said China energy analyst Robert Gee, head of Gee Strategies Group LLC.
"The Nexen deal was obviously critical in communicating a
signal -- it gave a green light" for Chinese investment in exploration
and production in the U.S. and Canada, he said.
Chesapeake's deal with Sinopec would give the Chinese company a
50% interest in 850,000 of Chesapeake's net oil and natural-gas
leasehold acres in the Mississippi Lime. Chesapeake will receive about
90% of proceeds upon the deal's close, expected in the second quarter,
with the remainder to be paid later.
The Mississippi Lime has been a target for companies using
fracking techniques in search of oil, but so far there has been only
moderate success. Chesapeake said it averaged 34,000 barrels a day of
oil and natural gas in its Mississippi Lime wells in the fourth quarter.
Analysts applauded Chesapeake for landing the deal with
Sinopec. But they also voiced concern that the company's need to sell
helped undercut the final price tag by as much as $200 million.