September 12, 2012 10:52 pm

Chesapeake – a complex company

The pressing problem is it spends more than it makes

Chesapeake is complicated. It owns an empire of US natural gas and oil assets, varying from the speculative to the productive, and a big oilfield services operation. Its financial structure is baroque (or possibly rococo) and its corporate governance widely criticized. Its most pressing problem is simple, however: it spends more than it makes. The company expects to spend roughly $14bn on capital expenditure, acquisitions, interest, dividends and taxes this year, against about $3bn in operating cash flow.

That gap got smaller on Wednesday, when the company announced that it had signed a deal to sell acreage in the Permian Basin of Texas and New Mexico for $3.3bn ; sold $900m in assorted other properties; and confirmed the sale of most of its pipelines to private equity for $2.7bn.

Given that the sales brought Chesapeake close its goal of $13bn-$14bn in asset sales in 2012 (it did $5bn in other sales this year) it is odd that its shares fell a bit on the news. The probable reason is the valuation of the Permian properties. While the per-acre price was strong, the company said that it had sold the “vast majority” of its Permian assets, even as it retained a third of its acres there, implying that what remains is not nearly so valuable – leaving the parcel as a whole looking less valuable than expected.

The issue may have been that there was not a long list of potential buyers. The fields require substantial further investment, ruling out private equity, which needs current cash flows. A foreign national oil company (read: Sinopec) would face political barriers. Independent oil companies would have trouble coming up with the money. That leaves the majors, two of which, Chevron and Royal Dutch Shell, were in on the deal. Asset sales – even when the assets are high quality – are always easier on paper than in reality.

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