2023-09-06 11:46:52 ET
Summary
- Chesapeake Energy has become a pure natural gas producer focusing on the Haynesville and Marcellus.
- It divested its Eagle Ford assets for $3.525 billion, largely in line with my expectations.
- $500 million of these proceeds are deferred to future years, while purchase price adjustments may also knock around $500 million off the final amount it receives.
- I believe Chesapeake is now fairly valued for a long-term $3.75 natural gas scenario.
Chesapeake Energy ( CHK ) has sold off all its Eagle Ford assets, so it will be a natural gas (only) producer focused on the Marcellus and Haynesville going forward. Chesapeake will still report a bit of residual production of oil and NGLs from the Eagle Ford until the last of its divestitures closes (by the end of 2023).
Chesapeake's Eagle Ford divestiture proceeds were largely in line with my expectations, although it should be noted that some of the proceeds will be received in installments and purchase price adjustments are reducing the actual amounts Chesapeake has been receiving upon deal close.
I believe that Chesapeake is roughly fairly valued for a long-term $3.75 NYMEX gas scenario currently.
Eagle Ford Divestitures
Chesapeake Energy has now sold off all its Eagle Ford assets in three separate transactions for a total of $3.525 billion.
I had initially valued Chesapeake's Eagle Ford assets at approximately $3 billion (in October 2022), but then increased the estimated value to $3.5 billion in November 2022 based on the metrics from the Ensign transaction .
Area | Purchaser | Price ($ Million) |
Brazos Valley | WildFire Energy | $1,425 |
Black Oil EF | INEOS Energy | $1,400 |
Condensate EF | SilverBow Resources | $700 |
Total Eagle Ford | $3,525 |
The combined value of Chesapeake's Eagle Ford divestitures is thus in line with my expectations, although there are a couple of things to note about the transactions.
The transactions included combined payments at closing of $3.025 billion, subject to closing adjustments. Another $500 million is to be paid in installments, with $166.25 million paid in the first year after closing (the closing dates vary by transaction), $116.25 million paid in years two and three and $101.25 million paid four years after closing. As well, the SilverBow transaction included up to $50 million in contingent payments depending on WTI prices during the year after the transaction closes.
The various transactions also have effective dates that were well before the deal closing dates. The WildFire Energy deal closed on March 20, 2023, and had an effective date of October 1, 2022. The INEOS Energy deal closed on April 28, 2023, and also had an effective date of October 1, 2022. The SilverBow deal is expected to close by the end of 2023 and had an effective date of February 1, 2023.
The large amount of time between the effective date and closing date has resulted in significant purchase price adjustments upon the closing of the deals.
Chesapeake reported receiving $1.963 billion in proceeds from property divestitures in the first half of 2023, while it was scheduled to receive $2.375 billion in proceeds (subject to purchase price adjustments) in the first half of 2023 from its WildFire and INEOS deals.
2H 2023 Outlook
Chesapeake expects to average approximately 3,310 MMCF per day in natural gas production during the second half of 2023. Around 3,240 MMCF per day of this natural gas production comes from its Marcellus and Haynesville assets, while the remaining 2% of its natural gas production comes from the Eagle Ford assets which it recently sold to SilverBow.
The SilverBow Eagle Ford assets may also average around 8,000 barrels per day in oil production and 9,500 barrels per day in production of NGLs during the second half of the year.
This report assumes that the SilverBow deal closes at the end of 2023 for ease of calculation.
The current natural gas strip for 2H 2023 is approximately $2.80. This leads to a projection that Chesapeake can generate $1.855 billion in revenues after hedges in the second half of the year.
Chesapeake's 2H 2023 hedges have positive $277 million in estimated value at current strip. Its hedges cover approximately 70% of its projected Q4 2023 production, so Chesapeake is significantly protected against weak natural gas prices over the next few months.
Barrels/Mcf | Per Barrel/Mcf | $ Million | |
Oil | 1,472,000 | $83.00 | $122 |
NGLs | 1,748,000 | $25.75 | $45 |
Gas | 609,040,000 | $2.30 | $1,401 |
Net Marketing And Other | $10 | ||
Hedge Value | $277 | ||
Total | $1,855 |
Chesapeake is now projected to generate $300 million in free cash flow in 2H 2023 before its investments in Momentum Sustainable Ventures. Including those investments reduces Chesapeake's projected 2H 2023 free cash flow to $90 million.
$ Million | |
Production Expenses | $160 |
Gathering, Processing and Transportation | $380 |
Production Taxes | $95 |
G&A | $70 |
Net Cash Interest | $40 |
Cash Taxes | $60 |
Capital Expenditures | $750 |
Momentum Equity Investment | $210 |
Total | $1,765 |
Cash And Debt
At the end of Q2 2023, Chesapeake had $975 million in cash and cash equivalents (including restricted cash). It also has $1.95 billion in unsecured notes due between 2026 and 2029.
Chesapeake's $0.575 per share quarterly base dividend may result in approximately $152 million in 2H 2023 dividend payments, based on its current share count. There probably won't be variable dividend payments for at least the next couple of quarters unless commodity prices improve, as Chesapeake is planning to invest over $200 million into Momentum Sustainable Ventures during the second half of the year.
$ Million | |
Cash (At End Of Q2 2023) | $975 |
2H 2023 FCF | $90 |
SilverBow Deal | $550 |
Less: Dividend | ($152) |
Cash (At End Of 2023) | $1,463 |
I've assumed that Chesapeake receives $550 million after purchase price adjustments from its SilverBow deal, with the price adjustments reducing the total received by $100 million due to the asset-level cash flow from February to the deal closing date.
This results in a projection that Chesapeake ends up with $1.463 billion in cash at the end of 2023 before any share repurchases. Chesapeake is also due another $500 million in future (after 2023) installment payments from its Eagle Ford divestitures plus up to another $50 million in contingent payments.
Valuation
I now estimate Chesapeake's value at approximately $84 to $85 per share based on a scenario with long-term $3.75 NYMEX gas. This is based on a multiple of 4.5x EV to unhedged EBITDA and roughly 3,240 MMCF per day in production. This production level is the same as Chesapeake's projected production from its Haynesville and Marcellus assets.
At that production level and a negative $0.50 differential, Chesapeake should be able to generate approximately $2.55 billion EBITDA. I've also included the value of Chesapeake's investment (at cost) in Momentum Sustainable Ventures and assumed that its roughly 13 million in outstanding warrants are exercised.
Thus I believe that Chesapeake is roughly fairly valued at this time for a long-term $3.75 NYMEX gas scenario now that it has divested its Eagle Ford assets.
Conclusion
Chesapeake Energy's Eagle Ford divestitures fetched it approximately $3.525 billion, although the actual cash receipts may be closer to $3.0 billion after purchase price adjustments. Chesapeake will also receive around $500 million of those proceeds in future years.
The Eagle Ford asset sale prices were largely in line with my expectations and should result in Chesapeake having a slight amount of net cash at the end of 2023, including the installments it is still due to receive.
As a pure natural gas producer now, I estimate Chesapeake's value at $84 to $85 per share at my long-term natural gas price estimate of $3.75. Thus I believe it is roughly fairly priced now.
For further details see:
Chesapeake Energy: Now A Pure Play Natural Gas Producer