In a short but telling news release, Chesapeake Energy (ticker: CHK) announced Sinopec will purchase a 50% undivided interest in CHK’s 850,000 net acres of the Mississippi Lime play in northern Oklahoma. The price tag: $1.02 billion in cash, or approximately $2,400 an acre to the 8/8ths. CHK will remain operator and JV costs will be shared proportionally going forward. CHK is currently running eight rigs in the Miss Lime. In a Q1’11 transcript, Aubrey McClendon, CHK’s former CEO said the company’s acreage cost in the Mississippian was well less than the $1,500 Utica acreage cost and that a lot of its acreage in the Mississippian was “legacy leasehold that would have essentially today no cost basis.”
Valuation: Sinopec purchased 50% of 34,000 BOEPD of production (Q4’12 average) and 140 MMBOE of proved reserves for $60,000 per flowing BOEPD and $14.57 per proved BOE to the 8/8ths. The median trailing twelve months per flowing BOEPD valuation of the large cap peer group in EnerCom’s E&P database is $76,380 per flowing BOEPD implying Sinopec paid virtually nothing for the undeveloped acreage.
Approximately 45% of Q4’12 production was crude oil, 9% was NGLs and 45% was natural gas. Applying the $2,400 per acre price paid per acre to CHK’s remaining 1.65 million net acres in the play equates to approximately $4.0 billion. During 2012, there were 36 deals in the Mississippian Lime. Of those 36 deals, we could find seven that disclosed acreage and a transaction price. Those seven deals had an average price paid per acre of $1,854.
Strategy: While the price tag is lower than what analysts put forward in their notes today, this marks a meaningful stride toward CHK’s goal of divesting $4 billion to $7 billion worth of assets during 2013. OAG360 notes with interest that the AMI with Sinopec is only on the Oklahoma side of the play. The street has been expecting a joint venture out of CHK in the Mississippi Lime since 2011 when the company first announced its future plans for the leasehold (see page 17) At one point in time, CHK was running 22 rigs in the Miss Lime. Now they are only running eight.
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Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Chesapeake following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
*Capital One Southcoast (2.25.13)
CHK to Sell 50% of Mississippian Stake to Sinopec
CHK announcing an agreement this morning to sell 50% interest of 850K net acres in its Miss Lime play for ~$1B. We will be contacting the company for further details. On its face, this transaction signals a $4.7B valuation, or $2,353/acre, for CHK’s ~2MM net acres in the play versus our modeled $5.9B valuation or $3400/acre. This lower valuation would reduce our current NAV target price by ~$2/share to $24; however, we view the cash infusion related to the transaction as a slight positive, offsetting our decreased valuation. All future exploration and development costs in this JV will be shared proportionately with no drilling carries involved. Although we do not know how much production is specific to the acreage in this transaction, 50% of YE12 production in the play of ~46 Mboe/d (45% oil, 46% natural gas composition) at $50K/flowing boe could have an estimated worth ~$1.2B. We see the transaction as neutral for SD’s ~1.9MM net Miss Lime acres, which we value at ~$2.3K/acre, but likely a negative for any investors hoping that the pending CHK Miss Lime transaction could boost current acreage values. Read through also appears neutral for DVN, where we model $2,100/acre for the play.
*Howard Weil (2.25.13)
Quick Take: Kicking off the Company’s 2013 asset monetization program, Chesapeake announced that it has entered into a joint venture agreement with Sinopec for a portion of the Company’s Mississippian acreage for a price that is below our expectations. According to the agreement, Sinopec will purchase a 50% interest in 850,000 net acres in northern Oklahoma for $1.02 billion. As of December 31, 2012, the acreage associated with the joint venture transaction had production of 34 Mboe/d (4Q12) and 140 MMBoe of proved reserves. CHK anticipates closing the transaction in 2Q13. The transaction equates to a purchase price of ~$2,400 per net acre or ~$60,000 per flowing Boe/d. Essentially, Sinopec is buying current production and getting the leasehold for free, assuming they paid close to the assigned $60,000 per flowing Boe/d. CHK will receive 93% of total proceeds at closing, with the remaining proceeds payable upon title contingencies. There are no drilling carries associated with the transaction. CHK will continue to serve as operator and will conduct all leasing, drilling, completion and marketing activities on behalf of the partnership. All future exploration and development costs are to be shared proportionately between the partners. While we view this as a necessary step and a much awaited transaction, the pricing is weaker than expected and below prior Mississippian transactions, yielding an overall negative takeaway.
*UBS Investment Research (2.25.13)
CHK monetized Horizontal Miss for $1.02 billion. CHK has agreed to sell a 50% interest in its core Horizontal Mississippi Lime position to Sinopec for $1.02 billion. CHK will be divesting 425,000 net acres, 23 MBoed net, and 70 MMBoe of net proved reserves. While CHK disclosed 4Q production averaged 34 MBoed (45% oil, 9% NGLs), Sinopec noted the production on the acreage had climbed to 46 MBoed at YE12.
No change to CHK estimates but long road ahead to meet disposition target. This deal enables $1 billion of CHK’s targeted 2013 asset sales of $4-7 billion. Assuming a 2Q close, CHK is divesting 28 Bcfe of the 35 Bcfe of production (80%) associated with planned asset sales. Thus, the remaining $3-$6 billion of asset sales will have to come largely from undeveloped acreage at a time the market seems to be paying less for acreage deals, e.g., note the disappointing CHK Permian deal prices, PXD’s failed Barnett deal, and lengthy time MRO, HES, and MHR have had Eagle Ford packages on the market.
CHK’s Horiz Miss deal valuation a negative read through for SD. Valuing 23 MBoed of net production at $50,000/Boed implies no value for the undeveloped acreage. Assuming 17 MBoed of net production, it implies just $400 per undeveloped acre. This is well below the $1,320/acre assumed in our SD NAV. Applying these metrics values SD’s NAV at ~$3.45-$6 per share.
Valuation: both CHK and SD expensive vs peers on cash flow metrics. $20 PT for CHK assumes 7.3x normalized 2013E DACF, in line with its hist avg.$6 PT for SD assumes 8.5x normalized ’13 EBITDX, near its hist avg.
*Baird Equity Research (2.25.13)
Chesapeake announces Miss Lime JV with Sinopec; negative lateral read to SD. This morning Chesapeake Energy (CHK, NR) announced that it completed its much anticipated Mississippi Lime JV with Sinopec for cash proceeds of $1.02B. Sinopec will purchase 50% interest in 850,000 net Chesapeake acres (425,000 net acres) in northern OK for $1.02B in total cash proceeds, no carry involved; 93% of cash received upon 2Q13 closing, remaining thereafter subject to title contingencies. Relatively low transaction multiples at $2,400/acre unadjusted; or $60,000 per flowing boe/$14.57/Boe of proved reserves. While we think some inherent discount is warranted given the all-cash up front component, the transaction implies very little value for unproved acreage. Chesapeake maintains ownership of ~1.5MM net acres in the Miss Lime with no comments on plans for development/sale outside of the JV area. This transaction is the first of many expected for 2013 as Chesapeake tries to hit its $5-$7B monetization target for the year to reduce its leverage. Could see lateral read causing weakness in fellow Miss Lime player SD this morning, as headline deal metrics appear to favor Sinopec and also because the deal doesn’t appear to include more speculative Kansas acreage (where SD holds a sizable position).
*Wells Fargo Securities (2.25.13)
Summary. On Monday morning, CHK announced an agreement to sell down a 50% interest in 850,000 net acres in the Mississippi Lime play. All of the acreage in the AMI is in Northern Oklahoma. Prior to the sale, Chesapeake held 2.1 million net acres in the play with a good portion of that in Kansas. Following the sale, the company will still maintain leases over 1.65 million net acres in the play. At this point it’s unclear if CHK still plans to seek a partner for the remainder of the acreage. Active rigs have recently been focused on the Oklahoma side of the border which at this point looks to be more de-risked than its northern neighbor. The Chinese investors continue to be very active in North America with Sinopec previously buying Canadian independent Daylight Energy in 2011 and joining a joint venture with Devon in 2012 covering a large acreage position in a number of plays. Chesapeake also holds ventures in the Eagle Ford and PRB/DJ Basin with CNOOC.
Metrics. We estimate Sinopec is paying approximately $60,000/Boe/d of production and $14.50/Boe for proved reserves. At those price levels likely not a lot of value place on undeveloped acreage within this deal.
Thoughts. We’re certainly not bowled over with the valuation paid, but CHK remains in a position of needing to pare down the portfolio and increase liquidity. This transaction helps towards accomplishing both goals. Chesapeake is targeting asset sales of $4-7 billion in 2013 to help pay down debt and fill an estimated funding gap of $3 billion. We estimate sales of $4.5 billion which would include additional non-core sales of smaller scale, a sale of a portion of the northern Eagle Ford acreage, finalizing the divestiture of midstream assets, and potentially a VPP transaction in the Eagle Ford. It seems that foreign investors have been less willing over the last few years to come in and pay a large amount for unproven acreage.
*SunTrust Robinson Humphrey (2.25.13)
Enters joint venture for Mississippi Lime assets. Chesapeake Energy (CHK, $20.50, Neutral) announced that Sinopec has agreed to acquire a 50% stake in its Oklahoma Mississippi Lime assets for $1.02 billion. Production averaged 34,000 Boepd in 4Q12, while proved reserves total 140 Mmboe across 850,000 acres. Transaction metrics equate to $60,000/Boepd, $14.57/Boe, $2,400/acre, and $1,680/acre after valuing production at $3/Mmcfepd.
Partial monetization. Chesapeake reported 2.1 million net acres in the play as of February 21, so this deal represents only a partial monetization of its position. Judging by the production figures, the remaining 1.25 million net acre leasehold is essentially undeveloped.
Prior deal metrics. In August 2012, Midstates Petroleum (MPO, $7.68, Buy) acquired 103,000 net acres (84,000 Mississippian, 19,000 Hunton) with production of 7,000 Boepd and proved reserves of 37 Mmboe for $650 million (50% cash, 50% preferred stock). Transaction metrics equate to $92,857/Boepd, $17.57/Boe, $6,311/acre, and $5,087/acre after valuing production at $3/Mmcfepd.
In December 2011, SandRidge Energy (SD, $5.96, Buy) entered into a joint venture with Repsol YPF to sell 363,636 net acres for $1 billion (25% cash, 75% carry), or $2,750/acre.
Reiterate Neutral. Deal metrics appear to be well below those of prior transactions, while the amount of acreage included was below our expectation. As such, this announcement supports a concern we raised in early-January that “more-than-anticipated upstream assets might have to be sold to reach the $9.5B stated year-end debt goal.” We reiterate our Neutral rating on CHK.
High profile deal for others in the play. As to others in the play, we believe investors may be tempted to mark the Mississippian acreage of other operators in the play at this somewhat lower valuation. However, we believe the deal reflects Chesapeake’s unique liquidity circumstances and the fact that its Mississippian acreage is west of the heart of the play. At the very least, this deal should raise awareness of SandRidge Energy, Midstates Petroleum, and Range Resources (RRC, $71.71, Neutral).
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