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After a rough run with its stocks amid bankruptcy rumors, battered Chesapeake Energy Corp. is now back in the game, with share prices soaring on news of a $385-million asset sale to a Colorado oil and gas company.
On Wednesday, Colorado-based FourPoint Energy LLC announced it would take on some 3,500 Chesapeake wells in Oklahoma and Texas for a price tag of $385 million in a deal that sent Chesapeake’s stock up 23 percent.
The asset sale will mean a full withdrawal of Chesapeake from the Western Anadarko Basin, but the market loves the idea.
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Chesapeake released its quarterly financial report on Wednesday—at the same time that the asset deal was announced by FourPoint—and stocks jumped 50 cents to $2.69.
It’s a lifeline for Chesapeake, which has reported an annual loss of some $14.7 billion and needed a big savings win to get back in the game and keep bankruptcy fears at bay. In the fourth quarter, the company reported a $2.2 billion net loss.
For FourPoint, it means it will now own all of Chesapeake’s Western Anadarko basin assets. Last July, the Colorado company moved to acquire $850 million in assets owned by two Chesapeake subsidiaries in Oklahoma. The new deal is expected to close by 29 April this year.
Earlier this year, Chesapeake said it was eyeing a major spending cut on drilling due to low oil prices. In all, the company is looking to cut drilling by 57 percent, and to divest up to $1 billion in assets.
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Chesapeake will now focus some 70 percent of its spending on completing wells that have already been drilled in order to sustain output.
This year Chesapeake’s stock market valuation has suffered phenomenally. A year ago it was around $20 billion. By mid-February this year, it was around $1 billion, and had been trading at under $2 a share until Wednesday, having shed more than $18 per share over last year.
This has sparked fears that Chesapeake was facing bankruptcy, but those fears seem to have been allayed if the 23 percent share price jump is any indication. But the company still has $500 million in debt that is coming due in March—and this is where the asset sale to FourPoint comes in handy.
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There has been much investor concern about whether Chesapeake would be able to cover its debts with planned asset sales and bond repurchasing. The plan was to purchase $240 million of the 3.25 percent senior notes due in March at discount rates, according to Bloomberg. The news agency also noted that Chesapeake had been buying up bonds that mature next year for 45 percent less than their value. The markets responded positively, but not all analysts agree.
“We still believe it is burdened by too much leverage and by legacy transportation agreements, and that if the strip (prices) were to hold true, that the stock has no equity value,” Doug Leggate, a Bank of America Merill Lynch analyst, wrote on Wednesday.
By Charles Kennedy for Oilprice.com
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Charles is a writer for Oilprice.com