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$7 Billion in Chesapeake Energy Deals Reshape Bull-Bear Divide

Stocks in this article: CHK CVX RDS.A GS JEF

(Updated to reflect Argus Research analyst comment on deal value)

NEW YORK ( TheStreet) -- Chesapeake Energy (CHK) has just cleared the biggest hurdle it faced in 2012, selling $6.9 billion in oil and gas drilling, leasehold, pipeline and terminal assets that it's deemed as "non-core," as oil giants like Royal Dutch Shell (RDS.A) and Chevron (CVX) push further into promising shale basins.

"The deal is a clear positive," says Sterne Agree analyst Tim Rezvan, adding that buyers as large as Shell and Chevron indicate there is a lot of interest in assets held within Chesapeake Energy's portfolio, which could help future capital or liquidity needs. "It weakens any near term bear case on cash flow or liquidity," Rezvan added.

So why aren't Chesapeake shares signalling an all-clear on Wednesday?

One down, one to go: With the near-term bear case on the company's cash crunch quieted, Chesapeake now has major 2013 hurdles to jump over.

Operational momentum and third quarter asset sales should support Chesapeake's stock, but investors will be looking for a detailed picture from upcoming third quarter earnings about 2013 leverage, spending and production plans, according to a late August analysis by Rezvan. That tension is highlighted in today's asset sales. Selling the Permian assets helps solve Chesapeake's short-term cash needs but muddies its production picture, taking away almost 6% of the company's total production.

A string of deals announced on Wednesday, in addition to previous asset sales, signal that the embattled Oklahoma City-based driller is moving closer to plugging a $14 billion financial gap this year. In total, Chesapeake Energy has announced $11.6 billion in asset sales this year, making the full-year goal of $13 billion-to-$14 billion in asset sales 85% complete, the company said in a statement.

Crucially, Wednesday's asset sales will allow Chesapeake Energy to repay a $4 billion loan provided to it by the firm's investment bankers, Goldman Sachs (GS) and Jefferies (JEF), as its cash needs escalated earlier in the year.

In at least eight transactions, Chesapeake Energy is raising funds by selling pieces of its empire of shale drilling, midstream and lease assets spread across the U.S. Most notably, the company is selling $3.3 billion in Permian Basin assets to oil majors Royal Dutch Shell and Chevron, as they expand into promising U.S. shale basins. Royal Dutch Shell will buy Chesapeake's assets in the southern Delaware Basin of the Permian Basin, while Chevron is buying assets in the northern Delaware portion of the basin.

Yet that short-term need invariably raises questions as to whether Chesapeake is maximizing value of the assets it is being forced to sell. While Permian-based cash is coming in faster than expected as short-term loans come due, the $3.3 billion sale price falls below previous management estimates as high as $6 billion, according to Wells Fargo analyst David Tameron, highlighting the liquidity pressures Chesapeake faced.

It's "easy to quibble over the valuation of Chesapeake Energy's divested assets, but in our view the aggregate amount received is more important right now," wrote Tameron, in a Wednesday note to clients. "First and foremost, Chesapeake needed to pay off the term loan and boost liquidity," he added, while stressing that in spite of the discounted value current trading price, better oil and gas opportunities exist elsewhere.

Chesapeake initially said it would raise $6 billion to $8 billion from Permian sales, a joint venture in the Mississippian Lime, and other miscellaneous transactions. Later, the company talked about a $4 billion to $6 billion value for the Permian alone, though on its most recent earnings conference call, Chesapeake CEO Aubrey McClendon declined a request from Bank of America Merrill Lynch analyst Doug Leggate during the analyst Q&A -- "I don't suppose you would care to comment on the $4 billion to $6 billion original range that you gave relative to what you think you are going to realize?" -- by saying that when the company had final numbers to report it would do so.

Phil Weiss, analyst at Argus Research, said the Permian brought in less than expected and yet the midstream sales raised slightly more money than expected, so there's a tradeoff, but there remain questions about the sale of producing asset specifically. With the Permian sales Chesapeake is giving up 6% of its production at a lower price tag than it hoped to get and a production mix that is tilted to the all-important liquids content, as opposed to dry natural gas. "The price looks more reasonable for the buyers than seller," Weiss said.

For Shell, the move adds to purchases of shale assets in North America, as it exits other regions. In a separate statement, Shell, the largest oil company in Europe, said it paid $1.9 billion for 618,000 net acres in the Permian Basin. "The acquisition provides both existing production and near-term growth potential from a proven resource, as well as promising opportunities for expansion," said Shell, in a statement.

Wednesday's deal adds to previous Shell acquisitions, including a $4.7 billion deal for shale driller East Resources in 2010 and a $5.8 billion acquisition of Canadian gas producer Duvernay Oil in 2008.

In total, Chesapeake said the assets being sold to Shell and Chevron produced approximately 21,000 barrels of liquids and 90 million cubic feet of natural gas per day in the second quarter of 2012, a figure that represents roughly 5.7% of the company's overall production in the quarter.

Previously, Chesapeake sold Midland and Permian basin assets to EnerVest, a privately held oil explorer that's been a longtime funder and buyer of disposed Chesapeake assets. The three Permian deals are expected to close in the next 30 days, with Chesapeake receiving 87% of its cash immediately, helping to repay a loan due in the fourth quarter.

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