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Analysts: Mississippi Lime JV metrics a negative for Chesapeake

Before the open today, Chesapeake Energy Corp. (NYSE:CHK) announced the execution of an agreement with China-based Sinopec to sell a 50% undivided interest in 850,000 of its net oil and natural gas leasehold acres in the Mississippi Lime in northern Oklahoma for $1.02 billion.

For its 425,000 net acres in the liquids-rich play, Sinopec will pay $1.02 billion in cash, of which approximately 93% will be received upon closing with no drilling carries involved—a departure from many of the Oklahoma City-based company’s prior joint venture agreements.

Production from these assets (including Mississippi Lime and other formations), net to Chesapeake’s interest and prior to Sinopec’s purchase, averaged approximately 34,000 barrels of oil equivalent per day in the 2012 fourth quarter and, as of December 31, 2012, there was approximately 140 million barrels of oil equivalent of net proved reserves associated with the assets. Of the 34,000 boe/d production from the Mississippi Lime, roughly 45% came from oil, 9% NGLs, and 46% natural gas.

Comp metrics
The deal metrics come in lower than recent comps, noted analysts at both Global Hunter Securities (GHS) and Stifel.

On August 4, 2011 SandRidge Energy (SD) entered a JV with Korea-based Atinum Partners Co. in which Antrim earned a 13.2% working interest in 860,000 acres (roughly 113,000 net acres) for $500 million, which equates to roughly $4,425/acre. Not long after, SandRidge announced a second JV with Repsol YPF, for 363,636 net acres in and around the area for $1 billion, or $2,750/acre, noted GHS, who said that today’s deal comes in lower than already depressed expectations.

“CHK essentially did this deal at the value of current production and reserves ($60K/flowing and $14.57/boe proved), receiving little to no credit for the 425,000 undeveloped acres it gave up to Sinopec as well. The last two SD JV’s were done at much more attractive terms, netting $2,750/acre and $4,425/acre and excluding associated production. CHK was counting on the MS Lime sale to be one of its big ticket sale items in order to hit its divestiture goal of $5B-$7B in 2013 - this deal highlights that CHK still has a long road ahead.”

The negative sale price assessment was echoed by analysts at Stifel who, in a note to investors after the announcement, said that “the transaction metrics are a slight negative if current production from the assets are not included and a clear negative if 50% of existing production is included in the sales price.”

Following Chesapeake CEO and president Aubrey McClendon’s retirement announcement, Stifel analysts noted the company would likely become more aggressive in its asset sales. 

Today’s announcement firms up Stifel’s view that “with the new management team, the company will be hitting the bids on asset sales rather than holding on to assets if the bids are not close to the underlying value.”

Despite the price, the sale does help the company move closer to a 1-year risked NAV ($29/sh), said Stifel analyst who noted that “as asset sales progress ($4-$7 billion planned for the year), the company should be able to close its gap towards its 1-year $29 NAV and we maintain our $25 target price.”

As the operator of the project, Chesapeake will conduct all leasing, drilling, completion, operations and marketing activities for the joint venture.

Jefferies acted as financial advisor to Chesapeake Energy in its joint venture with Sinopec around the company’s Mississippi Lime assets. This transaction represents the 3rd JV Jefferies has advised on involving a Chinese national oil and gas company (others included CHK’s Eagle Ford and Niobrara JVs with CNOOC). The transaction is anticipated to be completed in the 2013 second quarter.

 

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