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Chesapeake Plans More Asset Sales, Forecasts Higher Natural Gas Prices

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Chesapeake Energy Corp. said it expects to put more assets up for sale even as the company closes in on sales of its holdings in the oil-rich Permian Basin, the company chief executive said Tuesday.

Chesapeake, the second-largest natural gas producer after Exxon Mobil Corp., sold $7 billion in assets so far in 2012 as it seeks to cut its debt to $9.5 billion by year's end. Chesapeake and its competitors have been hurt by low natural gas prices, which fell to a decade low in April because new drilling technology increased production while a warmer-than-usual winter cut demand for home heating.

Chesapeake is identifying further assets to sell in the next year and a half, planning on up to $5 billion in sales for 2013, Chief Executive Aubrey McClendon said on an earnings conference call.

Chesapeake said it is in the process of closing a deal on a Permian Basin parcel with an affiliate of EnerVest Ltd., a Houston energy investment firm that has worked with Chesapeake in the Utica shale formation in the U.S. Northeast. Chesapeake said it also has received bids for two other Permian Basin parcels. The company said it has delayed to the fourth quarter its original schedule to sell a joint venture in the Mississippi Lime formation.

The focus on asset sales cheered investors. Chesapeake shares jumped 9.5% to reach $19.38 in recent trading.

Still, some investors remain worried that Chesapeake has become too dependent on asset sales to provide liquidity. The company may not be able to get the prices it hopes for what it's selling because of volatile commodity prices and the plethora of assets on the market, said Duane Grubert, analyst at Susquehanna International Group.

There is "less proceeds optimism now," Mr. Grubert said. There is "a flood of acreage deals available, weaker oil and gas pricing than before, and less credibility of Chesapeake as a strong counterparty for partnerships."

Chesapeake also said it expects prices for natural gas and natural gas liquids to improve starting in the fourth quarter. Chesapeake plans to cut its gas production by 7% in 2013, while supply of natural gas liquids is expected to drop as more producers cut back because of low prices.

"We expect gas markets to look very different in next few years than they have in past six months," Mr. McClendon said. "We think a multiyear upcycle for natural gas is now under way."

Chesapeake is also betting that it will increase its production of oil in the U.S., a more profitable commodity than natural gas. The company pointed to its increasing production in the Eagle Ford shale formation in South Texas and the Niobrara region in the western U.S.

In January, Chesapeake sold oil and gas leases to Chinese energy company Cnooc Ltd. for $570 million. As part of the deal, Cnooc agreed to fund two-thirds of Chesapeake's share of drilling and other costs up to a maximum of $697 million, a provision that Mr. McClendon said is now sending its return on operations there "into the stratosphere."

Chesapeake reported a second-quarter profit of $972 million, or $1.29 a share, up from $510 million a year earlier. The latest figure includes $584 million in an after-tax gain from the recent sale of its interest in Chesapeake Midstream Partners LP and $490 million in mark-to-market gains related to its hedging programs.

Excluding the asset-sale gains and other items, adjusted earnings were $3 million, or 6 cents a share. Revenue increased 2.1% to $3.39 billion.

Copyright (c) 2012 Dow Jones & Company, Inc.

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