(Chesapeake Energy, SandRidge Energy story updated for M&A commentary, market closing data)
NEW YORK (
shares are moving in opposite directions on Monday, as the market rewards Chesapeake for a $2 billion sale to the Chinese, and SandRidge shares get dumped by investors after its CEO sells a major portion of his holdings in the speculative drilling play.
The Chesapeake Energy sale of a 33.3% interest in its 600,000-acre Eagle Ford oil and gas holdings to the Chinese state-owned energy conglomerate
for $2 billion -- half of which is to fund Chesapeake drilling costs until the end of 2012 -- led to a spike as high as 6% in the premarket trading of Chesapeake shares. After the market open, the Chesapeake rally was cut in half, with shares up 3%. By the close of the market, the gain in Chesapeake Energy shares was 1%.
It's not surprising that the Chesapeake Energy rally would moderate even with the announcement of a major sale to the Chinese, energy's most active asset purchaser, and even though Chesapeake shares are down 19% over the past year, too.
Chesapeake more or less promised the market this deal, and in fact, promised it would have been completed on an even earlier schedule. Market chatter about a deal that had fallen through with India's
had added to investor questions about Chesapeake Energy's ability to finance its future. While it was never clear if Chesapeake had a deal in place with Reliance that fell through, the fact remained that Chesapeake needed to get a deal done given its balance sheet issues that include a huge debt plate it needs to pay down. The company had promised to pay down $3.5 billion in debt in the next two years.
Analysts' reaction to the deal was positive, but was tempered given the company's balance sheet and its history of aggressively financing its operations. Analysts described the deal valuation as being commensurate with recent strong pricing for similar acreage in the Bakken and Marcellus share plays. Even given the Chesapeake Energy financial strain, the deal was not priced as if Chesapeake Energy needed to liquidate to meet its financial needs -- far from it.
Yet there was some skepticism about the deal. Chesapeake Energy is hosting its annual analyst day this week and analysts knew that the company would want to have good news ahead of that meet and greet.
"It's a pretty good valuation, it brings their debt down to a manageable level, and I knew they would want to do something splashy around the analyst day," said Phil Weiss, analyst at Argus Research. "The timing is very much what we've come to expect from Chesapeake. As far Chesapeake shares, I still have some questions," the Argus Research analyst said.
Scott Hanold, analyst at RBC Capital Markets, said that Chesapeake has answered the questions about how it will finance its activities for the next two years with its Barnett shale sale to
early in 2010, and now with CNOOC not just buying an asset stake but funding drilling to the tune of just over $1 billion through 2012.
However, Hanold said investors need to remember that Chesapeake Energy has often shown a willingness to roll the rock up the hill over and over again.
"They have a track record of fixing the balance sheet and then going on to aggressive acquisitions, putting themselves in the same position again," Hanold said, adding, "they needed to get it done for the market to feel better and fund the deficit through 2012, but it was well priced."
As far as the deal value, there were two joint ventures in the Eagle Ford acreage announced on Monday, the second a deal between
. While the previous benchmark transaction was at $12,000 an acre in the
Pioneer Natural Resources
deal with Reliance, that deal had a lower upfront cash value, making Monday's transaction valuations in line with the strong pricing that can be expected for additional Eagle Ford M&A plays, according to Stifel research.
Stifel's energy research team released a note on Monday stating that the deals announced on Monday - at $10,800 (Chesapeake) to $10,900 (Talisman) an acre - could help other Eagle Ford operators including
as they pursue capital raises.
Energy investors were less enthused on Monday by the news that the CEO of SandRidge Energy, Tom Ward, had sold approximately 22% of his stock, or roughly 6 million shares. The SandRidge CEO has a history of selling shares, but the latest transaction was at least twice the size of the largest sale he has made in the past two years.
Analysts say while the CEO can justify the selling based on tax and financial planning, and given his consistent history of selling shares, the fact that he has sold twice as many shares as his previous largest sale, and after a recent rally in SandRidge, will naturally lead some investors to conclude that the SandRidge CEO knows shares aren't going higher any time soon.
Timing of the insider sale at SandRidge Energy makes sense, as the shares of the speculative energy play have rallied by roughly 20% over the past month. Investors may have been frustrated by the fact that just last week SandRidge added two slides to its investor presentation to highlight encouraging drilling results in acreage that many energy investors -- and the multitude of SandRidge shorters -- have been skeptical about. Now the CEO turns around and sells right after the company touted its most recent well results.
The previous big stocks sales by the SandRidge CEO in 2009 were also at much higher shares prices than last Friday's sale at an average price of $5.86.
SandRidge ended the day down 4%, with more than 26 million shares traded, close to three times its average daily volume.
"The stock has been a strong performer over the last month, and to see the CEO selling a significant portion of ownership into strength is always telling to investors," said RBC Capital Markets analyst Scott Hanold, adding that investors will conclude SandRidge shares have reached a short-term ceiling and something negative is ready to come out. "The fact it's larger than the transactions he has done in the past two years is what's going to concern investors," the analyst added.
The SandRidge CEO's total insider holding is still more than 21.8 million shares, though it is now at its lowest point in the past three years and had never before dipped below the 24 million shares mark.
"It's always tough to reconcile, always hard to see the CEO selling a big chunk, because the CEO has best insight and knowledge of the company. Even with tax planning issues and diversification, investors will conclude there is not a lot more upside in stock but he still has a meaningful ownership stake," Hanold said.
-- Written by Eric Rosenbaum in New York.
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