Chesapeake Sells $750 Million Stake in Utica Subsidiary
Chesapeake Energy (NYSE:CHK) recently sold $750 million worth of shares in its Utica Shale subsidiary to a group of private investors to fund the project development of the shale oil and natural gas deposit. [1] The company continues with its strategy of acquiring land and then re-selling it to third party buyers or investors for development of the projects. In one of our previous notes we discussed the potential risks of this strategy. Chesapeake Energy boasts the largest inventory of natural gas shale play leaseholds in the country (2.5 million net acres). It is also the second largest producer of natural gas in the U.S. after ExxonMobil (NYSE:XOM).
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The shares in CHK Utica LLC were bought by Blackstone Group’s GSO Capital Partners LP, Magnetar Capital and EIG Global Energy Partners LP. The 1.5 million acre shale is estimated to hold as much as 5.5 billion barrels of oil and 15.7 trillion cubic feet of natural gas. Per the agreement, preferred shareholders are entitled to receive a 7 percent annual distribution and a 3 percent royalty interest in the first 1500 wells that Chesapeake drills in the Utica basin. Additionally, Chesapeake has the right to buy back the shares till 2018.
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In a separate deal with an international energy company, Chesapeake announced its intent to sell 25 percent of the 650,000 acres it co-owns with Enervest Ltd in the region. The deal is valued at $2.15 billion, of which Chesapeake will receive $650 million in cash and $1.5 billion in drilling costs.
Profitability of Natural Gas is in question
Chesapeake has already invested more than $3.1 billion in securing leases for shale gas deposits this year. The rapid expansion in shale drilling activity across the nation has driven the 3.3% annual average increase in total U.S. natural gas production over the last five years, despite declining production from conventional resources. Meanwhile domestic consumption of natural gas during the same period only increased by 1% per year, leaving little room for natural gas prices to rise.
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