The land grab is over.
Chesapeake Energy Corp. managers and directors are working to reshape the Oklahoma City energy company into a leaner business, focused on 10 core areas of North America. They are working to sell most of everything where the company is not the No. 1 or No. 2 leaseholder.
Some analysts, however, say Chesapeake needs to further narrow its focus.
“We now move into a phase of asset harvest from seven years of asset identification and capture,” McClendon said at the company's annual meeting earlier this month. “It will become a completely different company to invest in.”
Deep in debt and working feverishly to change the focus from dry gas to oil and natural gas liquids, Chesapeake management has announced more than $6.6 billion in asset sales so far this year and plans to sell up to a total of $14 billion by the end of 2012.
The company has said it plans to sell another $7 billion in assets next year.
When the asset sales are complete, Chesapeake expects to focus on 10 of the 12 largest oil and natural gas plays in the continental United States. The company is No. 1 or No. 2 in each of its core plays.
Seven of the 10 focus areas are rich in oil and natural gas.
“The payoff for this corporate transition we have under way should be increasingly clear for all to see in our liquids production growth over the next year and in the years ahead,” McClendon said on a conference call in May.
Chesapeake produced 30,000 barrels a day of liquids at the end of 2009 and expects to increase that production to 250,000 barrels per day in 2015, McClendon said.
Oil and natural gas liquids represented 19 percent of Chesapeake's daily production in the first quarter of 2012, up from 13 percent in the year-ago quarter.
The sales strategy has drawn praise from Wall Street analysts.
“Chesapeake has one of the strongest asset positions in the industry, but they also have one of the largest balance sheets,” Oppenheimer analyst Fadel Gheit said. “The company is asset rich, but cash poor.”
While Gheit supports Chesapeake's effort to sell off its noncore assets, he said the company should further narrow its focus.
“I think it's too many areas,” he said. “You don't want to be a jack of all trades and master of none. That's fine if you have very deep pockets like Exxon, but Chesapeake is not Exxon. Chesapeake has to live within its means. What good does it do if Chesapeake is in 10 plays but has very heavy load of capital spending facing them for many, many years to come?”
The problem is similar to a situation faced by many homeowners, he said.
“If you're living in a nice home, but your mortgage is going to break your back, what good is it,” Gheit said. “Chesapeake has to redraw the line. They have to put in new priorities.”
Analyst Philip Weiss said he hopes Chesapeake's newly constructed board of directors will act quickly to narrow the company's focus.
“I've long been an advocate of them reducing the number of areas they have exposure to and to be more focused,” Weiss said. “I don't think it's necessary to be in every play. You can have too many, especially when you're in the financial position they're in.”
While the financial analysts questioned Chesapeake's strategy, credit analyst Scott Sprinzen said the company's diversification has some advantages.
“It's really not our role to like or dislike a strategy,” the Standard & Poor's analyst said. “But from a credit perspective, the fact that they have a large, diverse asset base is a positive. It also means that from a funding perspective it increases their options.”
Chesapeake's 10 plays stretch from Texas to Wyoming and New York.
The company's seven core, liquids-rich areas include more than 4.7 million net acres. It plans to keep all 10 areas where it is the No. 1 or No. 2 leaseholder, while working to sell most everything else.
The largest area Chesapeake plans to sell is its stake in the Permian Basin of south Texas. Chesapeake is the No. 3 leaseholder in the area, controlling about 1.5 million net acres. Analysts have said the company likely will receive $4 billion to $6 billion in the sale.
“We've had to basically limit the number of people who can come through our Permian data room to a double-digit number,” McClendon said last month. “We've got the thundering herd coming through.”
While Chesapeake is no longer acquiring property, the company stands to benefit from the fact that other companies are still growing.
“Maybe the land grab is over for Chesapeake, but it's not over for the industry,” Gheit said. “The land grab will continue. Everybody wants to secure acreage for the future.”
Some analysts have said Chesapeake's need to raise cash quickly combined with lower commodity prices is hurting the sales effort.
“When you're looking to sell an asset and the commodity price for that asset is falling, that makes it difficult to get the price you want for that asset,” Weiss said. “I can't sit here with certainty and say they'll get everything done. That's a lot to get done, but they have a good track record on sales.”
Chesapeake's large portfolio will help them attract the prices they want from potential buyers, Sprinzen said.
“They have a mix of attractive assets such that they have a certain amount of flexibility as to what they sell,” Sprinzen said. “We think it's likely that they'll be able to complete sufficient asset sales to fund their investment plans.”