Chesapeake Energy Update GREATER UNCERTAINTY AS TO DIVESTITURE PROCESS

Chesapeake Energy Capital Classic (Photo credit: Wikipedia)

CHK : NYSE : US$20.19
BUY 
Target: US$26.00

COMPANY DESCRIPTION:
Chesapeake Energy is one of the largest U.S. natural gas producers with an operating focus on the Barnett Shale, Haynesville Shale, Marcellus Shale, Granite/Colony Washes, Eagle Ford Shale and unconventional oil plays in the Anadarko/Permian Basins and Rockies.

Investment thesis

We lowered our price target $2 to $26 per share due to the base effect of ~5% lower Q4/12 production (~3% lower liquids output). Our liquids
outlook this year is in line with guidance though our ’15 liquids expectation of ~217 Mbpd is ~13% below the company’s 250 Mbpd goal.
Divestiture process increasingly opaque
In ‘12, Chesapeake generated ~$10.1 billion in proceeds from asset sales with ~$0.9 billion of sales scheduled to close early this year. In ’13, the
company plans to sell an incremental $3-6 billion of properties that may include a Mississippian JV or outright land sale and an Eagle Ford
property package producing 10+ Mbopd. We believe these divestitures should yield ~$2 billion in proceeds. Further, Chesapeake could materially sell down their 1.785 million net acres in the Marcellus, divest their 30% stake in FTS International, IPO up to 50% of their oilfield service company and/or execute another JV in the Utica.
Chances better than 50/50 that CHK can achieve a more appropriate 2x net debt-to-EBITDA leverage ratio At year-end, Chesapeake’s net debt-to-EBITDA was ~3.6x. Assuming the company can generate ~$4 billion of additional monetization proceeds with minimal production give up, CHK would lower net debt-to-EBITDA to the industry median of ~2x.

In subsequent years, assuming a steady state capital plan, the company remains $1.5-2 billion free cash flow negative though net debt-to-EBITDA only gradually rises.
Eagle Ford/Utica results solid
Eagle Ford wells have generally commenced at 500-1,000+ Boepd and recover ~500 Mboe (~80% liquids). Utica wells have commenced at an
average of ~1,000 Boepd (0%-30% oil) implying a ~800 Mboe recovery.