Oklahoma City-based Chesapeake Energy will sell half of its interest in its Mississippi Lime play assets to China's Sinopec International Petroleum Exploration and Production for $1.02 billion in cash.
Under the joint venture agreement, Sinopec will acquire a 50 percent undivided interest in 850,000 of Chesapeake's net oil and natural gas leasehold acres in the Mississippi Lime play in northern Oklahoma. Approximately 93 percent of the cash Sinopec is paying will be received upon closing of the deal.
The two companies will share all future exploration and development costs proportionately, with no drilling carries involved. Chesapeake will remain operator of the project, and will conduct all leasing, drilling, completion, operations and market activities for the joint venture.
Chesapeake Chief Operating Officer Steven C. Dixon said in a statement the Mississippi Lime joint venture would move the company further along in achieving its asset sales goals and "secures an excellent partner to share capital costs required to actively develop this very large, liquids-rich resource play."
Net production from Chesapeake's Mississippi Lime assets and other formations prior to the Sinopec acquisition averaged approximately 34,000 barrels of oil equivalent per day (boepd) in fourth quarter 2012. As of Dec. 31, 2013, approximately 140 million boepd of net proved reserves were associated with these assets.
The joint venture is expected to be completed in this year's second quarter.
Chesapeake's 24,000 boepd fourth quarter production from the play included 45 percent oil, 9 percent natural gas liquids and 46 percent natural gas, according to a Feb. 25 analyst note from GHS Research.
"The MS Lime sale comes in lower than already depressed expectations," GHS analysts noted. Chesapeake did the deal at the value of current production and reserves, according to GHS, including $60,000/flowing barrel of oil equivalent (boe) and $14.57/boe proved reserves, receiving little to no credit for the 425,000 undeveloped acres Chesapeake gave up to Sinopec.
The Chesapeake-Sinopec joint venture breaks out to $2,400/acre excluding production.
Two other joint ventures have previously been executed in the Mississippi Lime, both by SandRidge Energy, in 2011. In August of that year, SandRidge entered a joint venture with Atinum Partners Co. for 13.2 percent working interest in 860,000 acres for $500 million, or $4,425/acre.
In December 2011, SandRidge entered a second joint venture with Repsol YPF for 250,000 net acres in the extension Mississippi Lime play in western Kansas and 113,636 net acres in SandRidge's original Mississippi Lime play for a combined $1 billion, or $2,750/acre.
Both of those joint ventures were done at much more attractive terms, GHS commented.
"Chesapeake was counting on the Mississippi Lime sale to be one of its big ticket sale items in order to hit its divestiture goal of $5-$7 [billion] in 2013 – this deal highlights that Chesapeake still has a long road ahead."
The transaction metrics are slightly negative if current production from the assets are not included and a clear negative if 50 percent of existing production is included in the sales price.
"However, the asset sale also firms up our view that with the new management team, the company will be hitting the bids on asset sales rather than holding onto assets if the bids are not close to underlying value, "according to a Feb. 25 analysts report from Stifel, Nicolaus & Company.
While this takes away from the upside to a three-year unrisked net asset value (NAV) of $65/share, it does help the company move closer to a one-year risked NAV of $29/share, Stifel, Nicolaus & Company noted.
Chesapeake has been selling off assets in an effort to bridge a $4 billion funding gap and shift its focus from drilling natural gas to oil. Dow Jones Newswires reported last week that the company's fourth quarter earnings fell 36 percent in spite of higher revenue as the company pared crushing debt.