Chesapeake Oil Asset May Fetch an Extra Billion: Energy

Chesapeake Energy Corp. (CHK) may receive $1.8 billion more than estimated for a group of oil fields slated for sale, disposals needed to relieve a cash crunch at the second-largest U.S. natural-gas producer.

Chesapeake’s 1.5 million acres in the Permian Basin may be worth $6.82 billion, based on the price Concho Resources Inc. (CXO) agreed to pay this week for oil fields in the same area, said Michael Kelly, a Houston-based analyst at Global Hunter Securities LLC. Chesapeake Chief Executive Officer Aubrey McClendon estimated the value at $5 billion during a March interview at the company’s headquarters in Oklahoma City.

The potential for an extra billion dollars from what McClendon calls “the world’s hottest acquisition” comes after Chesapeake yesterday shelved a $1 billion sale of future production meant to help plug a cash-flow shortfall. The company risks a $16 billion funding gap this year and next, Standard & Poor’s said today. Chesapeake has said it may run out of money next year.

“This is probably going to be the biggest Permian asset sale in quite a long time and perhaps a long time into the future,” McClendon said on a conference call yesterday. “For a company that wants to get bigger in the Permian or wants to get in the Permian, this is the best opportunity.”

Chesapeake signed a $3 billion loan from Goldman Sachs Group Inc. (GS) and Jefferies Group Inc. (JEF) last week that McClendon called a “bridge” as it waits for asset sales to raise cash. Chesapeake increased the size of the loan to $4 billion today, according to a person with knowledge of the transaction.

Dwindling Liquidity

Without the loan, Chesapeake was in danger of exhausting the remaining borrowing capacity of its revolving credit facility by the end of next month, Philip Weiss, an analyst at Argus Research in New York. Weiss, who has a “sell” rating on Chesapeake shares, is the top-ranked analyst covering Chesapeake, based on the 1-year returns on his recommendation.

S&P cut Chesapeake’s corporate credit rating to BB- from BB today, the second downgrade in three weeks. The company’s rating was dropped to three levels below investment grade because of “less than adequate” liquidity, Scott Sprinzen, an S&P analyst, said today in a note to clients.

Concho Resources, based in Midland, Texas, agreed to pay $1 billion for closely held Three Rivers Operating Co.’s oil and gas assets, including 310,000 acres in the Permian, according to a May 13 release. Splitting off the producing assets, the company is paying about $3,000 an acre for undeveloped Permian land, Kelly calculated.

Concho Chairman and CEO Timothy Leach said yesterday the company plans to increase the number of rigs drilling in the Permian. The Three Rivers purchase is Concho’s third in six months in the Permian. Concho is “pretty well set” with its acreage, Leach said.

Looking at Permian

Anadarko Petroleum Corp. plans to look at Chesapeake’s Permian Basin assets and may acquire properties where it has some wells and leases, Anadarko Chief Executive Officer Al Walker said during a meeting with reporters today in The Woodlands, Texas.

Other buyers in the area in the past year include Linn Energy LLC and Vanguard Natural Resources LLC.

Occidental Petroleum Corp., the biggest producer in the Permian, had a bid for the Chesapeake assets rejected, according to a report yesterday in Forbes. The company offered about $3.5 billion, the magazine reported on its website, citing unidentified people with knowledge of the negotiations.

“There are no such negotiations taking place,” Eric Moses, a spokesman for Los Angeles-based Occidental, said in an e-mail yesterday.

Exxon Mobil Corp., which paid about $590 million to Chesapeake last month for leases in Oklahoma’s Texoma Woodford formation, declined to comment on whether it’s interested in Chesapeake’s Permian Basin assets. “We don’t comment on speculation,” David Eglinton, an Exxon spokesman, said today in an e-mailed statement.

Permian Reserves

The Permian may hold as much 4.5 billion barrels of recoverable oil reserves, according to a report last month from the U.S. Geological Survey. The number of active rigs drilling in the Permian in Texas increased to 273 at the end of last year, more than triple two years ago.

Apache Corp. continues to increase activity in the Permian, where it’s the second-largest operator. Apache will invest 42 percent more this year in the Permian, where it has about 1.5 million net acres, according to a May 8 presentation. The company isn’t interested in the Chesapeake assets, Chairman and CEO Steven Farris said March 6.

Chesapeake’s Permian Basin holdings will be sold by the end of September, McClendon said yesterday. The company also is seeking to raise cash by bringing in a partner to help cover drilling expenses in the Mississippi Lime formation in Oklahoma and Kansas, he said.

Three Companies Looking

Three companies examined reserves estimates and other geologic data for Chesapeake’s Permian Basin assets last week and the sale process will continue for another month, McClendon said. Goldman Sachs and Jefferies are among the firms advising Chesapeake, he said.

At the same time that McClendon reassured investors of robust interest in the Permian Basin assets, he canceled plans to raise as much as $1 billion this year through a so-called volumetric production payment from its Eagle Ford wells in south Texas. He also postponed an initial public offering for Chesapeake’s oilfield-services unit until at least next year, citing “market conditions.”

Chesapeake fell 5.6 percent to $14.65 at the close in New York. The shares have declined 34 percent this year, the worst performance by an oil and gas producer on the Standard & Poor’s 500 Index.

McClendon as Chairman

Chesapeake has lost 27 percent of its market value in the past four weeks following criticism of potential conflicts of interest from loans McClendon obtained using his personal stakes in company wells as collateral. The stock also has been battered as a surplus of North American gas sank prices to a 10-year low last month.

Chesapeake’s board said on May 1 that it will strip McClendon of the chairman’s position. The U.S. Securities & Exchange Commission opened an informal inquiry earlier this month. Chesapeake posted an unexpected $71 million first-quarter loss and said on May 1 that it may run out of money next year to fund its drilling program.

‘Razor’s Edge’

“We view the latest events as a continuance of the company living on the razor’s edge,” Brian Gibbons, a debt analyst at CreditSights in New York, said in a note to clients yesterday. The company’s efforts to reassure nervous investors have been “bizarre and confusing and unsettling.”

McClendon said Chesapeake doesn’t have the funds to drill as many wells as it wants in the Permian. A new owner would “probably need” about three times as many rigs as the 12 Chesapeake currently is using in the area, he said.

“It just needs to be done by somebody who has more resources than we have to put to work on those assets,” McClendon said. “To imagine that assets are unsellable in the Permian Basin, which is the world’s hottest acquisition basin today, is really unthinkable.”

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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