Did Chesapeake Energy Corporation (CHK) Get Ripped off in the Sinopec Shanghai Petrochemical Co. (ADR) (SHI) Deal?

Distressed prices for a distressed seller
Even compared to previous Mississippi Lime land sales, the per-acre price Chesapeake Energy Corporation (NYSE:CHK) received appears to be both undeserved and an outlier. Consider SandRidge Energy Inc. (NYSE:SD)‘s successive Mississippi Lime transactions in 2011, which both fetched higher prices per acre.

Back in August 2011, when SandRidge entered a joint venture with Atinum Partners, it gave the Korea-based firm a 13.2% working interest in about 113,000 net acres for $500 million, which comes out to $4,425 per acre. Shortly thereafter, SandRidge entered another joint venture with Repsol YPF, giving up a little over 360,000 net acres for $1 billion, which equates to a per acre price of roughly $2,750.

Importantly, both of these sales were for acreage that was significantly less developed and did not have any currently producing wells. In contrast, Chesapeake’s 850,000 acres have seen plenty of drilling activity over the past several years and are characterized as “the heart of the Mississippi Lime” by Morningstar analyst Mark Hanson.

Final thoughts
The arrangement with Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) is the latest development in Chesapeake’s asset sale program – a strategy the company hopes will help reduce a sizable cash-flow deficit. Last year, Chesapeake came close to, though ultimately failed in, meeting an ambitious asset sales target of $12 billion.

In addition, the prices it received for several key properties last year were much lower than the company’s initial projections, illustrating the woes of being a distressed seller trying to divest large chunks of oil and gas assets, or perhaps a management that consistently overshoots on its targets.

At any rate, it appears that Chesapeake Energy Corporation (NYSE:CHK) did indeed get ripped off on its most recent transaction. And since the company was depending on the sale of its Mississippi Lime assets to take care of a substantial portion of its asset sale target for the year, the much lower than expected transaction price should be an even bigger concern.

The article Did Chesapeake Get Ripped off in the Sinopec Deal? originally appeared on Fool.com and is written by Arjun Sreekumar.

Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.

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