Chesapeake Energy Corp will sell a 50 percent interest in some of its oil and gas properties in the Mississippi Lime shale formation to China Petroleum & Chemical Corp (Sinopec) for $1.02 billion cash, a valuation that fell short of some expectations.
Shares of Chesapeake declined 4 percent in morning New York Stock Exchange trading following news of the deal on Monday.
Hammered by prolonged low natural gas prices and a hefty debt load, Chesapeake plans to sell up to $7 billion of assets this year to help close a $4 billion gap between capital expenditures and cash flow.
A number of Wall Street analysts had expected Chesapeake to bring in a higher valuation for the Mississippi Lime deal, but they welcomed the liquidity boost the cash deal brings.
"We're certainly not bowled over with the valuation paid, but Chesapeake remains in a position of needing to pare down the portfolio and increase liquidity," analysts at Wells Fargo wrote to clients. "This transaction helps towards accomplishing both goals."
Shares of SandRidge Energy, a U.S. oil and gas company that has 1.85 million acres in the Mississippi Lime, fell almost 5 percent following news of the Chesapeake deal.
Sinopec will pay about $2,400 per acre, below the $3,400 per acre analysts at CapitalOne Southcoast in New Orleans had expected, the analysts said.
Oil and gas production from the assets averaged 34,000 barrels oil equivalent in the fourth quarter, and proved reserves are estimated at 140 million barrels oil equivalent, Chesapeake said.
HUNGRY FOR EXPERTISE
Output from shale fields in the United States and Canada has jumped over the last three years due to the advent of drilling methods such as hydraulic fracturing.
Companies in China, which has the largest shale reserves in the world, are keen to get the know-how for drilling in such unconventional fields.
China's state-owned CNOOC Ltd has struck a deal to buy Canadian oil and gas company Nexen Inc for $15.1 billion, while Pioneer Natural Resources Co said last month it would sell a stake in its assets in the Wolfcamp shale field of Texas to Sinochem Group for $1.7 billion.
Sinopec, Asia's largest oil refiner, will buy 50 percent of Chesapeake's 850,000 acres of net oil and natural gas leasehold properties in the Mississippi Lime shale field in northern Oklahoma, the companies said.
Chesapeake has about 2.1 million acres in the Mississippi Lime formation, which straddles northern Oklahoma and southern Kansas.
Chesapeake will be the operator of the properties owned with Sinopec, and development costs will be shared equally by the two companies.
Chesapeake's production from the Mississippi Lime region jumped 208 percent to an average of 32,500 barrels of oil equivalent per day in the fourth quarter, the company reported this month.
About 45 percent of the total output was oil, 46 percent was natural gas, and the rest was natural gas liquids.
Chief Executive Aubrey McClendon, who co-founded Chesapeake in 1989, is stepping down on April 1 following a tumultuous year during which the company faced a liquidity crunch and a governance crisis.
Sinopec struck a deal with Devon Energy Corp in January 2012 to buy a third of the U.S. oil and natural gas producer's interest in five developing fields for about $2.2 billion.
In October 2011 a unit of Sinopec signed a deal to buy Canadian oil and gas explorer Daylight Energy Ltd for more than $2 billion.
Shares of Chesapeake fell 87 cents to $19.63.