Sinopec Shanghai Petrochemical Co. (ADR) (SHI): Which Asset Will Chesapeake Energy Corporation (CHK) Sell Next?

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Following a recent joint venture agreement with Chinese oil company Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), Chesapeake Energy Corporation (NYSE:CHK) is back to contemplating which asset it will part with next, as the company seeks to plug a sizable funding gap.

Chesapeake Energy (CHK)Last month, the ailing natural gas producer announced that it would sell half its interest in some 850,000 of its net leasehold acres in the Mississippi Lime to Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI). The metrics of the deal came as a major disappointment, with Chesapeake Energy Corporation (NYSE:CHK) set to receive less than $2,400 per acre for its assets – less than a third of what the company said the land was worth in a presentation last year.

With that deal wrapped up, Chesapeake is hoping for more favorable terms on future asset sales. The company’s onerous debt situation, which has pushed its cost of capital higher, makes it all the more urgent to whittle down its funding gap as quickly as possible.

Looking ahead, Chesapeake Energy Corporation (NYSE:CHK) could sell parts of its undeveloped acreage in plays such as the Eagle Ford, the Utica, the Marcellus, the Haynesville, and the Powder River/DJ Basin. Let’s take a closer look at which of these assets might be next to go.

Potential gassy assets up for sale
Analysts at JP Morgan upgraded Chesapeake Energy Corporation (NYSE:CHK) in January, suggesting that the company may have another major asset sale opportunity “up its sleeve.” In a research note, the bank highlighted the company’s Marcellus and Haynesville assets as prime candidates for divestiture.

In the gassy Haynesville Shale play of northwest Louisiana and East Texas, Chesapeake holds the title of largest leaseholder, with roughly 530,000 net acres, of which 195,000 net acres are prospective for the Bossier Shale, a formation that lies directly above the Haynesville.

And in the Marcellus Shale, Chesapeake Energy Corporation (NYSE:CHK) is also the largest leasehold owner with 1.8 million net acres under its belt. The majority of this acreage – about 1.5 million – is in the northern dry gas portion of the play, while the remaining acreage is in the southern “wet gas” portion of the play. The company currently has five rigs operating in the dry gas portion and three rigs operating in the wet gas portion.

Experts think Marcellus assets next to go
In considering future asset sales, it would make more sense for Chesapeake Energy Corporation (NYSE:CHK) to part with a large block of undeveloped acreage, since selling producing acreage by itself would not only lead to a sharp reduction in cash flow, but also wouldn’t be accretive to multiples, according to a recent note by TPH Energy Research.

Given these criteria, TPH analysts believe the Marcellus is likely to be the next gassy asset to go. They estimate that Chesapeake’s acreage in the Marcellus could fetch $8 billion before tax or $6.4 billion after tax. While this would cover the company’s funding gap for the year, it would have negative consequences for Chesapeake Energy Corporation (NYSE:CHK)’s cash flow and aggregate production.

TPH estimates that a sale of Chesapeake’s Marcellus assets would lower 2013 cash flow by up to $600 million, while simultaneously reducing total production by 22%. It would also worsen the company’s cost structure by reducing gas differentials by up to 15%, according to the firm’s calculations.

Issues with selling natural gas assets
But selling natural gas assets at a time when most natural gas wells are uneconomical is probably a sure path to getting ripped off. With natural gas prices currently hovering near $3.50 per thousand cubic feet, virtually no energy producer wants to be developing Haynesville acreage. The steady downward trend in the Haynesville rig count is the most obvious evidence of this.

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