Chesapeake Energy sells 50 percent stake to Sinopec

April 2013 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Late February saw Chesapeake Energy Corp. agree to sell a stake in its Mississippi Lime shale oilfields to China Petrochemical Corp., otherwise known as Sinopec, for $1.02bn. Under the terms of the deal Chesapeake will receive 93 percent of the transaction price when the deal is completed, and payment of the remaining 7 percent will be made at a later date, dependent on certain conditions being met. The deal is expected to complete in Q2 2013.

Sinopec will acquire a 50 percent stake in 850,000 net oil and natural gas leasehold acres in the Mississippi Lime area. Sinopec will pay Chesapeake $2400 per acre, a price which represents a significant drop from the $7000 to $8000 per acre the company had earmarked for the land in July 2012. With investors taking a negative view of the deal, shares in Chesapeake fell 6.8 percent, or $1.39, to $19.11 on the New York Stock Exchange. Throughout 2012 Chesapeake lost 22 percent of its market value in addition to reporting its biggest annual loss since 2009, at $940m. In a statement announcing the deal, Chesapeake chief operating officer Steven Dixon said “We are excited to announce the execution of our Mississippi Lime joint venture with Sinopec, which moves us further along in achieving our asset sales goals and secures an excellent partner to share the capital costs required to actively develop this very large, liquids-rich resource play.”

Although all future exploration and development costs for the region will be shared proportionately between the two companies, Sinopec will enjoy more control over the joint venture’s drilling decisions and costs than previous business partners of Chesapeake. The US firm, however, will continue to carry out all leasing, drilling, marketing and operational tasks for the venture.

The asset sale fulfils a near year-long pledge made by Chesapeake, the world’s second largest natural gas producer, to sell at least a stake in the Mississippi Lime site, as the company looks to make up a $4bn cash shortfall. Chesapeake, like the rest of the North American natural oil and gas industry, is still trying to recover from the collapse in US natural gas prices, as well as the costly shift towards more profitable oil drilling. Natural gas prices have plummeted and revenues have markedly shrunk in the region due to the overabundance of gas produced by hydraulic fracturing, or fracking. With natural gas accounting for approximately 80 percent of Chesapeake’s output, the firm said its Q4 earnings for 2012 fell 36 percent as the company was impacted by debt buyback expenses and natural gas prices 20 percent lower than Q4 2011. The company’s decline in revenue forced Chesapeake into asset sales of more than $10bn in 2012 in order to improve its balance sheet.

Some analysts believe that Chesapeake has not obtained a particularly competitive price for the oilfields; indeed, there is a concern that the company’s need to offload assets quickly has led to the final price tag for the stake being undercut by as much as $200m. According to Chesapeake, the Mississippi Lime site was only producing the equivalent of 34,000 barrels of crude oil a day in the final quarter of 2012. On 21 February, however, the company reported that production in the area had tripled during Q4 2012, compared with 2011. Despite these promising figures, the region has provided only comparatively modest returns so far.

Chesapeake placed the Mississippi Lime formation up for sale in 2012, and had spent much of the year marketing the region to Asian energy companies with little success. Increased scrutiny from regulators regarding foreign takeovers of US energy assets has hampered any potential deals from being completed. Chesapeake chief executive officer Aubrey McClendon noted in November that heightened regulatory pressure meant that potential foreign takeovers “became more complicated”. It is believed, however, that Canadian and US government approval of the $15.1bn China National Offshore Oil Corporation takeover of Nexen Inc., has alleviated any concerns there may have been surrounding further similar takeovers.

Richard Summerfield