Chesapeake’s McClendon Taps Expanding Shale Oil Demand
Chesapeake Energy Corp. (CHK) negotiated a higher-than-expected price for oil fields in the U.S. Southwest as the natural-gas driller exploited a growing appetite for shale assets among the world’s largest energy explorers.
Chesapeake agreed yesterday to sell drilling rights and wells on about 1 million acres in the Permian Basin of Texas and New Mexico for $3.3 billion in three separate transactions with Royal Dutch Shell Plc (RDSA), Chevron Corp. (CVX) and EnerVest Ltd. The proceeds equate to $3,200 an acre, which exceeds the $3,094 an acre in implied value that ITG Investment Research estimated a larger group of assets in the region would fetch.
The Permian Basin, a 300-mile (480-kilometer) long geologic formation that has been gushing oil and gas for more than 90 years, is attracting renewed interest from major international oil producers who quit the region in the mid-1980s as falling oil prices made aging fields unprofitable to operate. Hydraulic fracturing and horizontal drilling techniques have now opened shale formations that geologists formerly wrote off as impermeable.
“This shows that the larger companies are very interested in the horizontal development going on in the Permian Basin,” Scott Hanold, an analyst at RBC Capital Markets LLC in Minneapolis, said in a telephone interview. “Right now, the new Permian prospects are where the Bakken shale was four years ago. For the super majors, it’s a new development opportunity where they can get a significant position.”
Stung by the lowest prices in 13 years for the fuel that comprises 80 percent of Chesapeake’s production, Chief Executive Officer Aubrey McClendon pledged to auction about $20 billion in assets by the end of 2013 to finance the company’s transition to a crude producer. Analysts including Philip Weiss of Argus Research Group expected Chesapeake to fall short of its sales goal for the Permian as potential buyers, knowing the company’s predicament, held out for lower prices.
Shell, Europe’s largest oil company by market value, will acquire three-fourths of the assets being sold after agreeing to pay $1.94 billion for 618,000 acres in Texas. Chevron, which paid $3.2 billion last year for Appalachian shale driller Atlas Energy, will boost its Permian holdings by 35 percent. Terms of the Chevron and EnerVest deals weren’t disclosed.
The sales in the Permian Basin, along with $3.6 billion in other oilfield and pipeline deals announced yesterday, will enable McClendon to repay a $4 billion bridge loan from Goldman Sachs Group Inc. (GS) and Jefferies Group Inc. (JEF) before the effective interest rate jumps from 8.5 percent to more than 10 percent in January.
Chesapeake’s $1.3 billion of 9.5 percent debt due February 2015 rose 1.35 cents to 113.85 cents on the dollar to yield 3.5 percent as of 8:30 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the highest price since April, when the securities traded as high as 114.6 cents, Trace data show.
McClendon has a little more than 100 days to sell another $1.4 billion in assets to reach his goal of raising at least $13 billion from divestitures this year to plug a looming cash-flow gap.
The remaining $1.4 billion to be raised this year probably will come mostly from a joint-venture partner who would exchange cash for a stake in Chesapeake’s Mississippi Lime holdings in Kansas and Oklahoma, James Sullivan, an analyst at Alembic Global Advisors, said in a telephone interview.
Mississippi Lime wells cost 50 percent less to drill than those in the Bakken shale, indicating a more robust profit margin, the company said in a July 16 presentation on its website.
Gas futures traded in New York have averaged $2.56 per million British thermal units this year, which would be the lowest annual average since 1999, according to data compiled by Bloomberg. Advances in drilling and fracturing shale and other so-called unconventional formations unleashed a flood of gas that has overwhelmed North American markets and collapsed prices.
McClendon may have been able to obtain an even higher price if his negotiating position hadn’t been compromised by low gas prices and the impending cash crunch, Philip Weiss of Argus said in an e-mailed statement. “The company was not necessarily negotiating from a position of strength,” Weiss said. When the agreements announced yesterday are completed, McClendon will be 58 percent toward his 2013 fundraising goal.
Chesapeake is “going to get the gap covered for this year,” Alembic Global’s Sullivan said. In 2013, the company probably will need to sell its oilfield-services unit and stakes in other energy-industry operators to cover a $4.5 billion to $5 billion gap between expected cash-flow and spending, he said.
U.S. explorers that pioneered the new shale-drilling techniques, such as Devon Energy Corp. (DVN) and Chesapeake, are transferring those practices to formations soaked in crude in a bid to replicate the successes in gas-rich rocks.
One such success story has been the Bakken formation of North Dakota and Montana, where oil output more than quadrupled in the past three years as a result of the new techniques, according to data compiled by Bloomberg Industries.
In addition to undrilled reserves of oil and gas, the Permian sale will give Shell the equivalent of 26,000 barrels of daily crude production. Chevron’s acreage will include the equivalent of 7,000 barrels of oil a day, the San Ramon, California-based company said in a statement yesterday.
Chesapeake will retain 470,000 of the 1.5 million acres it originally sought to sell in the Permian. Those acres will be remarketed or drilled at a later date, the company said.
Alembic’s Sullivan said Chesapeake’s decision to retain some of the Permian acreage shows it wasn’t a desperate seller. “The only reason for holding on to it is that they didn’t get the price they wanted,” he said. “So they are going to sit on it and get a better value for it at a later date.”
Chesapeake, the second-largest U.S. gas producer, lost as much as 60 percent of its market value in the past year. Investors battered the stock amid low gas prices and federal probes of potential conflicts between McClendon’s personal financial transactions and his chairman and CEO duties.
McClendon, 53, was deposed as chairman in June and more than half the board was replaced as Chesapeake’s largest shareholders, Southeastern Asset Management Inc. and Carl Icahn, agitated for governance reforms. McClendon also is losing access to a corporate perk that allowed him to buy personal stakes in almost every well the company drilled.
“It’s a positive sign that there are proven counterparties that want to do business with Chesapeake,” Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York, said yesterday. McClendon and Archie Dunham, who replaced him as chairman in June, have “delivered” on a promise to accelerate asset sales and narrow the cash gap, Rezvan said.
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