CWEI Clayton Williams Energy, Inc.

Chesapeake Energy Corporation (CHK) announced that it has closed the transaction to divest its interests to BHP Billiton Petroleum, a wholly owned subsidiary of BHP Billiton Limited (BHP). The divested interests are in about 487,000 net acres of leasehold and producing natural gas properties in the Fayetteville Shale play in central Arkansas. The deal was announced on February 21 for a total consideration of $4.75 billion in cash.

Under the transaction, Chesapeake sold assets producing approximately 415 million cubic feet of natural gas equivalent per day and midstream assets with about 420 miles of pipeline to BHP Billiton Petroleum.

Additionally, Chesapeake will facilitate technical and business assistance for about a year on the properties for an agreed-upon fee. This divestment is part of Chesapeake’s 25/25 plan, intended at reducing its long-term debt (through monetizing its assets and a reduction of lease-hold spending) by 25% during 2011–2012 while increasing its natural gas and oil production by 25%.

The agreement that Chesapeake entered into  with oil and gas explorer Clayton Williams Energy Inc. (CWEI) last month, affirms its commitment to the 25/25 plan. Under the deal, the company intends to  sell up to 75% stake in its acreage at Reeves County.

We also appreciate Chesapeake’s initiative of deploying more funds toward liquids. Given the ongoing uptrend in oil prices, the company is planning to deploy more capital to drill liquids-rich plays, particularly Granite Wash, the Eagle Ford Shale, the Anadarko Basin, the Permian Basin and Rocky Mountain. We think the company’s focus on these shale gas plays should provide the impetus to monetize these more effectively and thereby boost returns.

However, given our fears of challenging natural gas fundamentals in the near term, we believe that the stock will perform in line with the group. We are maintaining our long-term "Neutral" recommendation on the stock. Oklahoma City-based Chesapeake currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

 
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