Last January, Chesapeake Energy (NYS: CHK) launched its 25/25 plan, under which the company promised to reduce its long-term debt by 25% and to increase its production by 25% within two years. One year has now passed, and the company's plan is well under way. The plan has become the 30/25 plan, with production growth projected at 30% rather than the previously announced 25%. As we watch the company's progress under its 30/25 plan, it's not hard to see that the name of the game is "monetization."
One aspect of Chesapeake's two-year plan is the reduction of long-term debt. As of the third quarter, the company had reduced its long-term debt to $11.8 billion, down nearly a billion from $12.7 billion at the end of 2010. If the company successfully follows through on its 25% debt reduction plan, it should have $9.53 billion in long-term debt at the end of 2012. One of the main ways to achieve this goal has been to raise cash through asset sales.
The first major sale was for a 33% interest in Chesapeake's 800,000 net acres in the liquids-rich Niobrara shale to CNOOC (NYS: CEO) for $1.3 billion in cash and drilling and completion carries. The total transaction, which closed in February 2011, comes out to $4,751 per net acre. Chesapeake expects to receive the drilling and completion carries by the end of 2014.
The second major asset sale was for 487,000 net acres in the Fayetteville shale and related midstream pipelines, sold to BHP Billiton (NYS: BHP) for $4.75 billion in cash. The transaction, which closed in March of last year, came out to about $9,754 per net acre and marked Chesapeake's exit from the Fayetteville shale, a shift away from gas that the company would continue over the course of 2011.
In November, Chesapeake announced an initial public offering of 20 million common units of the Chesapeake Granite Wash Trust (NYS: CHKR) at $19 per common unit. Those 20 million units represent gross proceeds of $380 million. The trust owns royalty interests in 69 producing and 118 future developmental wells located on 28,700 net acres in the Colony Granite Wash play in the Anadarko Basin.
Early last month, Chesapeake announced the placement of $750 million in preferred shares of CHK Utica, which came out to $1.25 billion total when added to its earlier $500 million sale of perpetual preferred units. CHK Utica owns 700,000 net acres in the Utica shale and pays out an annual distribution of 7%, paid each quarter. The preferred shares were placed with a group of limit partners led by EIG Global Energy Partners.
Late last month, Chesapeake agreed to sell off its Marcellus shale midstream assets to Chesapeake Midstream Partners for $865 million. As part of the agreement, Chesapeake has committed to generating EBITDA of at least $100 million in 2012 and $150 million in 2013 on land that is served by the pipelines involved in the transaction.
Last but not least, the company announced earlier this month the closing of a joint venture with Total (NYS: TOT) for a 25% interest in approximately 619,000 net acres in the Utica shale. Chesapeake contributed 542,000 net acres to the joint venture and received $2.03 billion for its part. There was $610 million received in cash at closing and $1.42 billion will be received as a drilling and completion carry, which Chesapeake again expects to receive by year end 2014. The total transaction value came out to $14,982 per net acre.
Foolish bottom line
This is hardly an exhaustive list, but it demonstrates Chesapeake's desire to raise cash. If the company continues its present course of asset monetizations, it should mean that the company is not racking up debt to acquire acreage it cannot develop. I'll be watching to see whether Chesapeake continues to follow through on its 30/25 plan, which involves the all-important 30% production growth component. Many of the transactions involved drilling and completion carries, which should help the company increase production over the next several years at a low cost.
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At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up to date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. Paul owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Total and Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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