Chesapeake Energy (NYSE: CHK, Stock Forum) has a lot going for it. The second largest natural gas producer in the United States, it is a leader in natural gas production from shale rock.
Recently, it’s made a number of deals with foreign investors, mostly European energy companies. But it did just come to terms with two of Asia’s most active investment funds. They intend to spend $1 billion for a stake in Chesapeake.
Temasek, a Singapore sovereign investment fund, has apparently agreed to buy $600 million of convertible preferred stock. And Beijing-based Hopu Investment Management has signed on for another $100 million.
In addition, Temasek has a 30-day option to acquire another $500 million worth of shares. Chances are that it will, along with other Asian businesses such as Seatown, Temasek’s sister fund.
If so, that $1.1 billion would translate into a near 7% equity holding in Chesapeake in the future.
Despite natural gas trading at less than a third of oil prices, the Asian funds see nothing but upside. They believe that natural gas has hit a cyclical low point.
They also believe demand will climb on environmental concerns, which does make some sense. Natural gas is about 30% less carbon intensive than oil. And it trumps coal by 50%.
Chesapeake Energy’s debt & negotiating deals
For all of Chesapeake Energy’s potential, it still has its faults. Due to heavy debt levels, it currently doesn’t have an investment-grade credit rating… which explains why it wants to raise up to $5 billion over the next two years.
But based on its prior successful deals, Chesapeake should have no problem raising $5 billion.
Its latest agreements involved selling $10.8 billion in gas holdings to European energy firms. That includes BP ADR (NYSE: BP, Stock Forum), Total ADR (NYSE: TOT, Stock Forum) and Statoil ADR (NYSE: STO, Stock Forum). The latter was an especially profitable union, leading to prospecting for new shale natural gas resources in 14 different locations around the world.
Each partnership involved the buyers taking a 20-33% interest in a portion of natural gas acreage. Both companies then jointly develop the acreage through new technology and expertise.
Going forward, the company will likely sell up to a 20% stake in Chesapeake Appalachia. Shares of that subsidiary, which includes Chesapeake’s Marcellus shale operations, should go up for sale in the next three to 12 months.
Overall, it’s a good strategy to obtain more financing. It works particularly well considering the continuing difficulties obtaining credit from banks.
Sure, it may prove difficult for Chesapeake to manage so many deals, given their joint-venture nature. But it could pull it off very well all the same.
Leader in U.S. natural gas
Debt and negotiating skills aside, outside companies like Chesapeake Energy so much because of its leading position in U.S. natural gas.
Its resource base in the United States is substantially larger than any other company. So Chesapeake has enough acreage to sell some of it off. After all, in the country, it is one of the most active companies drilling for natural gas, responsible for one of every seven wells.
So far, it has held onto anywhere from 67.5% – 80% in these joint venture shale assets. And it still maintains either the number one or two positions in Marcellus, Barnett, Haynesville and Fayetteville, the four major shale gas fields in the U.S.
About 92%-93% of the company’s overall energy production comes from natural gas. So maintaining those fields allows it to grow its natural gas production by 6% – 8% in 2010 and 14% – 16% in 2011. Selling some of their assets at a profit simply serves to underscore its value.
Jeffrey Robertson, an analyst at Barclays Capital, had this to say on the matter:
“We believe [the deals] underscore the value of Chesapeake’s franchise position in four of the major gas shale plays. They have allowed Chesapeake to recover significant value while retaining substantial reserve and production upside in the plays.”
Why Chesapeake Energy’s future is bright
Despite its debt load, Chesapeake’s future looks bright.
The recent deal with Hopu Investment Management is a smart move especially. That business has an advisory arm that could help Chesapeake smooth the way for a joint venture deal with a Chinese oil major. CNOOC ADR (NYSE: CEO, Stock Forum), Petrochina ADR (NYSE: PTR, Stock Forum) and SinopecADR (NYSE: SHI, Stock Forum) could all be in play in the near future.
Driven by China’s goal to produce 25% of its natural gas from shale deposits in the next two decades, those companies are looking to developing shale gas in the Sichuan province especially. So they should look favorably on a partnership with Chesapeake.
In addition, there is always the possibility of a takeover. ExxonMobil (NYSE: XOM, Stock Forum) might very well have started a trend when it bought natural gas company XTO Energy. Because according to rumors, Chevron (NYSE: CVX, Stock Forum) and others may now be considering Chesapeake.
But whether that happens or not, Chesapeake’s future looks brighter than ever… especially if natural gas prices rise.
Disclosure: The author does not hold positions in any of the securities mentioned