Chesapeake Energy Corp.'s sale this week of a portion of its Mississippi Lime leasehold has drawn mixed reactions from investors and analysts.
The Oklahoma City-based energy company said its joint venture agreement with Chinese oil company Sinopec International Petroleum Exploration and Production Corp. includes a 50 percent interest in 850,000 acres of Chesapeake's leasehold in the Mississippi Lime of northern Oklahoma.
The joint venture represents less than half of Chesapeake's 2 million acres in the Mississippian play, which extends into western Kansas.
The price translates to about $2,400 an acre, far less than the $7,000 to $8,000 the company said in July it expected to receive, and less than the $4,400 an acre and $2,750 an acre SandRidge Energy Inc. received in similar transactions in 2011, before much of the infrastructure and development began.
In August, Midstates Petroleum bought 103,000 acres in the area for about $6,300 per acre.
Morningstar analyst Mark Hanson was not overly impressed with the terms of Chesapeake's announcement.
“At $2,400 per net acre, the deal with Sinopec has to be somewhat disappointing for Chesapeake,” he wrote in an analyst report Tuesday.
“The fact that SandRidge's Mississippi Lime acreage was far less developed at the time of its JVs makes Chesapeake's deal with Sinopec even more underwhelming.”
Despite the lower-than-expected price, Hanson said the sale is an important step toward Chesapeake meeting its funding goals.
“Importantly for Chesapeake, however, the fact that all proceeds will be received up front ... helps close the $4 billion funding gap the company is projecting for 2013,” Hanson said.
Argus analyst Phillip Weiss shared many of Hanson's concerns.
Instead of looking at price per acre, Weiss focused on price per produced barrel of oil equivalent. At the company's production rate at the end of 2012, the deal is worth about $44,000 per produced barrel equivalent, less than two-thirds of the median sales price in the area over the past 12 months of about $76,000 per produced barrel.
“While the announced JV (joint venture) with Sinopec is a necessary step in the company's effort to monetize $4 billion to $7 billion of assets in 2013, the price received is disappointing,” he wrote in a research report Wednesday.
Weiss said Chesapeake's Mississippi Lime sales price likely was discounted because it needed the cash up front, but that it was still a good move.
With most joint ventures, an investor company pays a relatively small price up front and agrees to fund a percentage of the drilling costs going forward through what is known as a drilling carry. With Chesapeake's most recent deal, however, Sinopec agreed to pay 93 percent of the total $1.02 billion up front.
Doug Leggate, an analyst for Bank of America Merrill Lynch, said Chesapeake's sales price is not as bad as it looks and that the dire analyst warnings are “flawed.”
He said the price Chesapeake received is based on the number of rigs the company has looking for oil and natural gas in the Mississippi Lime.
Because of funding and budget constraints, Chesapeake has reduced its rig count in the area to eight. At that level of drilling activity, Leggate said, the play is worth about $3,500 an acre on a fully developed basis. At 40 rigs — the amount SandRidge is using — the area would be worth $10,000 an acre, he said.
“There is no other way to summarize Chesapeake's much anticipated JV deal in the Mississippi Lime other than to acknowledge that headline metrics looked disappointing — at least versus other transactions in the play that had broadly set expectations,” Leggate wrote Wednesday.
“However, our analysis suggests this implication of the acreage value is highly misleading — and in fact we challenge the idea of valuing any resource play on acreage value. Instead, we contend that so long as the drilling locations are available, all other things equal, acreage values are entirely a function of the development pace.”
Leggate said Chesapeake is being criticized because it has taken steps to reduce spending.
“The market appears ready to treat CHK (Chesapeake) as always a glass-half-empty story in our view,” he wrote. “It is criticized for overspending cash flow — but the consequences of slowing spending is a lower per-acre value, for which it is also criticized.”
Chesapeake's stock price slipped nearly 7 percent Monday after the company's announcement, but has since recovered most of what it lost, closing up 39 cents, or 2 percent, Wednesday at $20.14 on the New York Stock Exchange.