Monday, February 7, 2011

Chesapeake to Sell Fayetteville Assets

Chesapeake Energy announced today  that it will sell some of its assets with the goal of paying down debt.  The company plans to sell its Fayetteville Shale assets along with its 25.8% ownership of Frac-Tech Holdings, LLC and its 20% ownership of Chaparral Energy, Inc.  Chesapeake hopes to generate around $5 billion in proceeds (more from Bloomberg).

The company's 487,000 net Fayetteville acres currently produce about 415 MMcf/day.  Chesapeake signed a joint venture with BP to produce the Fayetteville back in September 2008.  In 2009, Chesapeake promoted it as one of its "Big 4" shale plays, but being a more mature dry gas producer with less favorable economics than the company's news ventures, the Fayetteville has become expendable.

Last year I made light of Petrohawk Energy for selling some of its cash generating assets (midstream and producing fields) to fund its upcoming capital expenditures, calling it a "Yard Sale" (interestingly, Petrohawk agreed to sell its Fayetteville assets to Exxon/XTO at the end of 2010)  I don't think these sales by Chesapeake qualify as such.  In general it seems to be a smart move and one probably brought on by new investor Carl Icahn.  I don't know the cost basis for the company's investment in Chaparral or Frac-Tech, but hopefully for CHK it's a buy-low sell high situation.  It is likely that neither were material cash flow generators, so they are taking up space on the balance sheet hogging potential capital that can be better deployed elsewhere.

I think these deals reveal the true nature of Chesapeake.  Using the language of real estate, Chesapeake is a developer, not a buy-and-hold investor or an operator/manager.  The company's management has a taste for risk and the guts to make bold moves.  They have built a machine that best operates on the leading edge of a play.  Ultimately, operating a mature gas field is not in the company's nature and is why it is not a true comparable to most other E&P companies.

Like the parable of the frog and the scorpion, a company, like a person, has difficulty changing its nature.  Chesapeake goes to great pains in its investor materials to emphasize that it's #1 or #2 in the various hot plays across the country (straight out of General Electric's playbook under Jack Welch), but one never gets the sense that Chesapeake wants to be the staid operator of all of those fields.  Instead, the company monetizes these assets to fund new projects.  It is exactly what a real estate developer does.  The difference in this case is that Chesapeake usually sells off a portion and sticks around to drill on someone else's nickel.  With these proposed deals, Chesapeake will leave the field to fight another battle.

But to me, selling out of these assets fits right in with Chesapeake's nature.

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