Chesapeake Asset Sales Likely to Accelerate with McClendon Departure

Chesapeake Energy's asset sale pace will likely accelerate beyond $17 billion to $19 billion in assets for 2012/2013 in light of co-founder and CEO Aubrey McClendon's departure in April, as the company's board will likely favor pulling the present value of Chesapeake's massive 15.1 million undeveloped acreage forward, according to a Jan. 30 research note from GHS Research.

The pending departure of McClendon over "philosophical differences" took GHS analysts by surprise. In a meeting with McClendon in last year's fourth quarter, GHS analysts said they came away thinking that these philosophies were more in line than worlds apart.

"In fact we were told that everything positive that could come from tighter corporate discipline at Chesapeake would in fact emerge," according to a Jan. 30 GHS research note.

Analysts were also told that the board was on the right track in terms of setting management's 2013 bonus criteria in which return on capital, efficiency gains, and hitting budgets would be the favored incentives versus prior year targets that centered almost entirely on growth.

Chesapeake Chairman Archie Dunham told company employees in an email that Chesapeake is not for sale. GHS does see value for a major who might want to make a play on Chesapeake, which has massive undeveloped acreage positions in plays such as the Utica, Marcellus, Eagle Ford, Mississippian and Power River/DJ Basin.

However, Chesapeake's intimidating capital structure, which includes seven joint ventures, $12.6 billion in long-term debt, $3 billion in preferred equity, and $2.4 billion non-controlling interests, present complications.

"We think that a major with lower cost of capital versus Chesapeake can quickly get to a starting point of $30/share of value fairly easy," GHS noted.

To meet future funding gaps, Chesapeake needs to sell a large, desirable position of undeveloped acreage in order to right-size its balance sheet, as selling production by itself is not accretive to multiples, and the loss of cash flow generation offsets an improved balance sheet, according to a Jan. 30 research note from TPH Energy Research.

"Given the current strategy, the Marcellus is the only gassy asset that fits the bill," said TPH analysts, who believe Chesapeake's Marcellus asset could fetch $8 billion, or $6.4 billion after tax.

Even after selling its single most valuable asset, it's not enough to repair the long-term leverage trajectory without making other adjustments to future plans, such as scaling back leasing and spending less on ancillary investments.

A sale of Marcellus assets would reduce 2013 cash flow by $550 to $600 million, according to TPH estimates, while reducing aggregate production by 22 percent. The cost structure of the company also would change slightly with gas differentials worsening by 10 percent to 15 percent, given transportation commitments on other assets.

All else equal and assuming no incrementally announced asset sales, TPH anticipates the company will reaccumulate $9 billion in new debt by year-end 2015 which again puts the balance sheet in an undesirable position. Chesapeake would have to further reduce drilling activity in the Mississippi Lime and the Cleveland-Tonkawa, and reduce capital expenditures by $500 million to $1 billion per year, and leasing by $300 million per year.

"Only then would Chesapeake's outspend be in-line with cash flow growth by 2015," TPH noted.


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