Chesapeake Energy Corporation (CHK) in an endeavor to bridge the funding gap has put its Permian Basin oil fields up for sale. In the case of an outright sale, the properties are expected to yield an amount in excess of $10 billion.
The Permian Basin, spanning 75,000 square miles across west Texas and New Mexico, is the largest oil-producing areas and the most rich reserves after North Slope in Alaska.
Chesapeake maintains a strong position in the Permian Basin with approximately 1.5 million acres of leasehold in unconventional liquid plays – the Avalon Shale, Bone Spring, Wolfcamp and Spraberry in West Texasand southern New Mexico.
Permian Basin accounts for about 5% of Chesapeake’s total reserves and output. The company is mulling over the options to either sell the Permian Basin assets or spin out the Permian assets into a separate company.
Chesapeake intends to bring in about $12 billion in 2012 by selling non-core assets in order to reduce its debt burden. This takes into account fractional sale of the Permian fields.
Upon completion, the deal will take Chesapeake, the second-largest U.S. producer of natural gas behind Exxon Mobil Corporation (XOM), closer to its target of achieving debt reduction and narrow a projected funding gap.
In the current scenario of declining natural gas prices, most of the independent exploration and production companies are tilting their portfolio towards oil-based assets and divesting gas-based assets. Chesapeake has been keeping gas production under check in response to the weak natural gas prices.
Thus, Chesapeake’s ongoing asset monetization move aims to rationalize its asset composition and benefit from the divestment of gas-based assets. Chesapeake holds a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock.
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