Is Chesapeake Energy’s $4 Billion Assets Divest the Right Move?

Chesapeake Energy (NYSE: CHK) has recently announced its plans to sell additional assets, and make several strategic changes in 2014. These changes are expected to cut down its annual production and operating cash flow. Following this news the company’s stock dropped by almost 5%. Is this price cut justified? Are Chesapeake Energy’s latest steps the right course of action? How will these developments impact the company? Let’s take a closer look at the main expected changes and their potential effect on Chesapeake Energy.

Between spinoffs and sell offs

The management of Chesapeake Energy decided to divest several of its assets including three noncore assets in Southwestern Oklahoma, East Texas and South Texas. These sales alone will bring in $310 million in cash. In addition, the company plans to spinoff its fully owned subsidiary Chesapeake Oilfield Operating to its shareholders. This will free up nearly $1.1 billion of debt, which is currently on Chesapeake Energy’s books. This transaction is expected to come to fruition by the end of the second quarter. Chesapeake Energy also reached an agreement to sell its ownership of CHK Cleveland Tonkawa to preferred members. This divestment will erase $1.0 billion of equity attributable to third parties. It will also eliminate $160 million of balance sheet liabilities. How will these transactions affect Chesapeake Energy?

Lower production – reduced cash flow

The company has revised its 2014 guidance for the second time this month. In the previous revision, its daily oil equivalent production rose to an average of 700 mboe mainly due to an expected rise in its NGL operations in the coming quarters. This came to a 1.8% rise in its average production over the initial outlook.  This time, however, the company revised down its oil equivalent production by 2.1% from the second estimate and by 0.4% from the first figure. Its current guidance is set at an average of 685 mboe. This reduction is due to the above-mentioned assets divestments. This will also translate to a $250 drop in Chesapeake Energy’s operating cash flow in 2014, according to its CEO Doug Lawler. Despite these cut backs, these transactions are likely to benefit the company in terms of debt, dividend and interest payments.

Improved balance sheet

These transactions are projected to improve the company’s balance sheet by slashing its debt by nearly $3 billion. For a company with a total debt of almost $13 billion, these asset sales will reduce its burden of debt by 23%. In total, Chesapeake Energy’s 2014 asset sales (including the assets sold before this announcement) will come to more than $4 billion.  This will also be part of its asset divestment in recent years; after all back in 2012 it sold $6.9 billion of its assets; in 2013 it sold part 50% of its ownership in its Mississippi Lime oil and gas acreage for $1.02 billion.  Therefore, these recent assets sales are inline with Chesapeake Energy’s strategy of the past three years.

The company expects these recent assets divestments will slash its capital expenditures by nearly $200 million; they are also projected to cut interest expense and dividend payments by $70 million during the year.

In conclusion…

The recent decision of Chesapeake Energy’s to sell additional assets will have only a modest negative impact on its total production or operating cash flow. Moving forward, these divestments could reduce the company’s financial risk by cutting its debt. Finally, these asset sales will also free up some cash, which could allow the company to invest in other more profitable projects. 

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