Chesapeake, Devon Kick Off 2012 Energy Deals (Update 1)

Updated to reflect Devon Energy $2.2 billion shale spin to Sinopec

NEW YORK ( TheStreet) --

Devon Energy ( DVN) is selling a 33% interest in five shale ventures to Chinese energy giant Sinopec ( SIPC) for $2.2 billion, adding to a fast start for shale sales in 2012.

For the one-third shale stake, Sinopec will pay Devon Energy $900 million in cash and a further $1.6 billion in payments for drilling expenditures through 2014, roughly 70% of the projects exploration costs. The deal, along with a similar shale sale by Chesapeake Energy ( CHK) to Total ( TOT) of France on Tuesday signals that energy deals may stay hot in 2012 as foreign companies cut U.S. deals to bolster their reserves and build new drilling skills.

Devon Energy's divestiture follows a series of spins, including its deepwater oil exploration portfolio. In 2010, the Oklahoma City -based company sold $7 billion worth of U.S. deepwater assets to BP and it cut similar sales to A.P Moeller Maersk of Denmark, CNOOC ( CEO) of China and U.S. -based Apache ( APC) among others.

Sinopec's one-third shale asset purchase of Devon Energy shale assets, which include acreage in the Tuscaloosa Marine , Niobrara, Mississippian, Ohio Utica and the Michigan Basin shale formations is indicative of a wider push by Chinese companies into North American shale assets.

In October 2011, Sinopec spent $2.1 billion to buy Canadian shale specialist Daylight Energy. China has estimated that there are 1,275 trillion cubic feet of shale gas reserves in the U.S. and Canada, Bloomberg reports, which is a higher than a similar assessment made by the U.S. Energy Information Association in April.

To read more on U.S. to watch for as Chinese companies cut energy deals in North America, see how China is primed for the U.S. oil market in 2012 .

For Devon Energy, the shale stake sale to Sinopec will allow the company to consolidate its drilling costs among a diverse portfolio of shale assets. "This arrangement improves Devon's capital efficiency by recovering our land and drilling costs to date and by significantly reducing our future capital commitments," said Devon Chief Executive John Richels in a press release.

Chesapeake Energy's ( CHK) $2.3 billion sale of its stake in a Ohio shale venture to French oil giant Total ( TOT) earlier on Tuesday gives oil and gas deals a hot start in 2012 after the sector topped M&A activity last year.

Chesapeake Energy's sale of its 25% shale joint-venture stake with EnerVest to Total follows previous shale divestitures to foreign oil giants like BHP ( BHP), BP ( BP) and Statoil ( STO).

Meanwhile, after buying $2.25 billion of Barnett shale assets from Chesapeake Energy in 2010, Total is continuing a U.S. energy push, which includes shale, deepwater and solar energy assets.

Oil and gas was the hottest M&A sector in 2011, with $259 billion in deals -- but that amount reflected a 17% year-over-year drop from 2010, according to Dealogic. Kinder Morgan's ( KMI) $37.9 billion acquisition of El Paso ( EP) was the biggest deal of 2011 after a $39 billion wireless merger between AT&T ( T) and T-Mobile USA was struck down by antitrust authorities.

Continued energy deals are among some of the boldest M&A predictions for 2012. To read more on M&A to watch for in the next year, see the 5 unexpected deals themes for 2012.

Devon Energy shares rose over 6% to $65.87 in early afternoon trading on news of the deal. The company's shares fell roughly 20% in 2011 as gas prices slumped to post crisis lows. Meanwhile, Chesapeake Energy shares rose over 4% to $23.20. In 2011, its shares fell over 10% and are less than half of pre-crisis levels above $60 a share.

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In the deal, Total will pay Chesapeake Energy $610 million for 619,000 acres in the Utica shale formation in 10 counties in Ohio and EnerVest will receive $290 million. After maintaining its operatorship of the drilling assets -- which the Associated Press reports are oil rich - instead of gas - Chesapeake Energy will get a further $1.42 billion to continue drilling operations through 2014.

To date, Chesapeake Energy has drilled 13 wells in the Utica shale and expects a further 25 rigs to be mobilized for exploration. If drilling goes as planned, Total expects to gain 100,000 barrels of oil equivalent per day by 2020 from the Utica ground, according to a press statement.

The announcement marks a spin of Utica shale assets that Chesapeake management outlined on a November third quarter earnings call, without naming a buyer.

"This is consistent with our strategy to develop positions in unconventional plays with large potential and, in this case, with value predominantly linked to oil prices," said Yves-Louis Darricarrère, President of Total's Exploration & Production unit.

Shale drilling, which requires fracturing rock formations with highly pressurized blasts, may cause environmental damage and result in minor earthquakes. In December, a draft report from the U.S. Environmental Protection Agency reported on the link between fracking and water pollution - which include possible drilling compounds in drinking waters. The Wall Street Journal also reported in December that Ohio courts have filed an injunction against companies drilling wells for fracking waste waters near Youngstown, Ohio as a result of earthquake reports.

About environmental concerns and Chesapeake's continued operations in the Utica shale, Darricarrère of Total said, "Total is conscious of the environmental aspects linked to developing shale acreage and is confident in Chesapeake's capacity to manage the Utica shale operations in a responsible manner, respecting the highest industry standards."

For Chesapeake Energy, the shale asset sale follows many similar divestitures. In 2011, the Oklahoma City -based company sold $4.75 billion of Fayetteville shale assets to BHP Billiton of Australia and over $1 billion in Eagle Ford shale assets to and CNOOC ( CEO) of China, among many divestures cut last year. Those deals followed similar billion dollar- plus shale divestitures to BP of England, Statoil of Norway and Plains Exploration and Production ( PXP) in 2008.

In July, Chesapeake Energy said that its 1.25 million Utica shale acreage was worth between $15 and $20 billion, as a result of logs on over 2,000 wells and full seismic mapping of 200 wells. The company also said that the Utica shale was expected to be "economically superior" to the Eagle Ford shale of Texas.

For more on Chesapeake Energy see the 5 most crazy company sellers since the financial crisis and T. Boone Pickens' portfolio.

Total has also been an acquirer, taking a 60% stake in U.S. solar giant for over $1.38 billion SunPower ( SPWRA) in 2011, in addition to a shale acquisition from Chesapeake Energy and a deep-water drilling partnership in the U.S. Gulf of Mexico with Cobalt International Energy ( CIE). For more on Total, see TheStreet's portfolio of top rated oil and gas stocks.

-- Written by Antoine Gara in New York