Zacks_Analysts' Blog : Chesapeake Gets Busy in Utica - Analyst Blog

Chesapeake Energy Corporation (CHK) recently inked two transactions, to monetize a portion of its 1.5 million net acres of leasehold in the Utica Shale play mainly in eastern Ohio. Upon implementation, the deals would add nearly $3.4 billion to the company’s kitty.

Chesapeake has signed a letter of intent with an undisclosed international major energy company to form a joint venture (JV) through which the latter will acquire a 25% stake in approximately 650,000 net acres of leasehold in the wet natural gas area of the Utica Shale play. Chesapeake hopes to close the deal by mid-December.

Of the total acreage, around 570,000 acres are leased by Chesapeake and 80,000 acres owned by Houston-based EnerVest Ltd. The price to Chesapeake would be $15,000 per net acre or approximately $2.14 billion. Around $300 million will be paid to EnerVest.

As much as $640 million in cash will be handed over to Chesapeake at closing while the remaining $1.5 billion will be paid as drilling and completion costs by December 2014. Chesapeake will be the operator of the JV and will carry out all leasing, drilling and completion operations as well as marketing activities of the project.

The buyer will have an option to lease 25% of any additional acreage obtained by Chesapeake and the choice to participate with Chesapeake in the development of infrastructure related to production.

In another transaction, Chesapeake announced the formation of a new subsidiary, CHK Utica LLC. The company intends to sell $500 million of its perpetual preferred shares in CHK Utica to EIG Global Energy Partners of Washington, D.C. Chesapeake also plans to sell another $750 million of shares in the new entity to other investors. As per the deal, Chesapeake is committed to drill a minimum of 50 wells a year through 2016 for CHK Utica.

Chesapeake holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. We maintain a Neutral rating on the stock for the long term. The company also faces threats from its competitors EOG Resources (EOG) and Devon Energy Corporation (DVN).