Analyst Says Sale by Chesapeake Of Shale Assets 'a Natural Evolution'

by Joanna Kauffmann  on Monday, Feb. 14, 2011 12:00 am  

Chesapeake Energy Corp.'s decision to sell $5 billion worth of Fayetteville Shale assets may has as much to do with its balance sheet as it does with the long-term viability of the north-central Arkansas natural gas reserves, according to an industry analyst.

"This is something that happens in the business over and over again," Chris McGill, managing director of policy analysis for the American Gas Association, said of last week's announcement. "It's called flipping a piece of your position. In most cases, it's simply there to get something back."

As of Sept. 30, the publicly traded corporation headquartered at Oklahoma City reported nearly $15 billion in long-term debt - so much that its public filings included a plan to pay off 25 percent of that debt by 2012. Proceeds from the recently announced sale - together with the company's joint venture with China National Offshore Oil Corp. - should retire between $2 billion and $3 billion of shorter-date senior notes as well as reduce bank debt.

Exploring for gas in shale plays like the Fayetteville is an expensive proposition, with most of the cost on the front end.

"They could be paying a thousand dollars per acre or more in one of these play areas," McGill said. "A million acres, which certainly a company the size of Chesapeake could have, at a thousand an acre - that's a billion dollars right out of the chute, and you haven't produced anything yet."

And even when production does begin, companies are not likely to see a fast return. "Even if you started drilling, even if you started making money on gas, you're probably still way more invested in than you are getting out. It's just a natural evolution of the business portion of it to turn or to flip in order to improve or change your cash position."

Chesapeake's competitors in the Fayetteville Shale may also have had something to do with its decision to sell, McGill said.

"In terms of the Fayetteville Shale specifically, Chesapeake was competing against Southwestern Energy," he said, referring to the Houston corporation that is the largest exploration company working in Arkansas. "I don't know precisely how 'good' their acreage was compared to others."

Kathy Deck, executive director of the Center for Business & Economic Research at the University of Arkansas' Walton College of Business, said that Chesapeake's announcement wasn't surprising considering the depressed price of natural gas.

"When you look back over when we did a study at the beginning of the Fayetteville Shale [development], natural gas prices were much higher. It is not surprising that these companies are seeing a lower return on their investments than they expected back in the beginning."

Deck agreed with McGill that ownership change was a natural part of the natural gas business.

"I don't think it's surprising, and I think that we would expect to see over time companies either shedding assets or being acquired by other companies and buying and selling strategically," she said.



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