Chesapeake shares rise on takeover talk

Mikaila Adams
Editor, The Financial Update

While no major move has been made following the early November speculation about a possible buy-out bid from BP plc, the rumors about Chesapeake's position on the take over block have yet to completely quiet.

Chesapeake Energy Corp. stock prices rose by as much as 14% amid the early speculation and were expected to continue on that trend when, on November 11, the company announced a joint venture with StatoilHydro that would bring the company more than $3.35 billion. Despite approval from analysts, shares of the company fell, along with much of the market, following the news.

It wasn't the first time. In early September, BP plc bought one-quarter of a natural gas-producing venture in Arkansas' Fayetteville Shale from Chesapeake for $1.9 billion. Analysts liked the sale, saying it was a strategic move by Chesapeake to free up capital for development. Despite this, Chesapeake's stock fell.

Despite this precursor, the continued fall of the company's shares following the Statoil deal was surprising. Overheard at the recent Houston Energy Financial Forum, an attendee spoke about the deal. "It was a good move," she said, citing Chesapeake's need to sell off assets to raise liquidity.

StatoilHydro bought a 32.5% interest in Chesapeake's Marcellus shale acreage, covering 1.8 million net acres, for $1.25 billion in cash and a further $2.125 billion in the form of a 75% carry on drilling and completion of wells during the period 2009 to 2012. Merrill Lynch was financial advisor to StatoilHydro and Chesapeake was advised by Jefferies Randall and Dewey.

StatoilHydro acquired future recoverable equity resources in the order of 2.5-3.0 billion boe. The agreement covers more than 32,000 leases in the states of Pennsylvania, West Virginia, New York, and Ohio.

Chesapeake plans to continue acquiring leasehold in the Marcellus Shale play and StatoilHydro now has the right to a 32.5% participation in any such additional leasehold.

Additionally, the companies have agreed to an international alliance to jointly explore unconventional natural gas opportunities worldwide.

Helge Lund, president and CEO of StatoilHydro, stated, "This is a significant step in strengthening our US gas position, building on our existing capacity rights for the Cove Point LNG terminal, our gas trading and marketing organization and the gas producing assets in the Gulf of Mexico."

Basically, Statoil has the money to sink in to the project, yet they are a new player in the US project, so the worry about them taking over is lessened. It's a win-win for Chesapeake. And a win is what Chesapeake needs.

The company has taken a series of blows in recent months. An aggressive drilling program warranted just months ago, has now left the company with a large debt in inopportune times. In addition, the company has been battling billions in litigation. In October, margin calls forced CEO Aubrey McClendon to sell nearly all his company stock. Pre-sale, McClendon held an estimated 33,469,359 shares, worth a few billion just months ago. At the time he ranked #134 on the 2008 Forbes 400 list of richest Americans.

The tables have turned. At one of its lowest points, Chesapeake shares were down nearly 69% from July highs of $73.89.

To combat some of the downturn in recent months, Chesapeake has served up a series of strategic moves. Three shale joint ventures, including the recent Statoil deal, collectively value the company's Haynesville, Fayetteville, and Marcellus Shale assets (before the joint ventures) at roughly $34 billion.

Chesapeake sold a 20% working interest in its Haynesville Shale assets to Plains Exploration & Production Co. for $3.3 billion, a 25% working interest in its Fayetteville Shale assets to BP America for $1.9 billion, and now the sale of a 32.5% working interest in the Marcellus Shale to StatoilHydro for $3.375 billion. From these, Chesapeake has raised nearly $8.575 billion, of which roughly $4 billion is cash.

An inquiry to Deutche Bank as to whether or not the joint venture puts to rest the takeover speculation or positions the company's balance sheet more favorably was returned "no comment."

At presstime, a Chesapeake spokesman had not responded.

It seems as though Chesapeake is doing all the right things in terms of balancing financials and increasing liquidity. Perhaps the speculation and stock prices have more to do with overall uncertainty in the markets than with the company itself.

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