Chesapeake Drilling for Cash? (CHK, BP, PXP)

Chesapeake Energy (CHK) announced today that it will create a joint venture with the US division of BP plc (BP) that will give BP a 25% stake in Chesapeake’s Fayetteville Shale assets in exchange for $1.9 billion. Following the transaction, BP will own about 135,000 net acres of Chesapeake’s current 540,000 net acre leasehold.

As part of the deal, BP pays $1.1 billion up front, in cash, at closing, and the remaining $800 million by funding drilling and completion expenses through the rest of 2008 and into 2009, until the money runs out. But that’s not the best part for BP. If Chesapeake acquires any future leaseholds in the Fayetteville Shale play, "BP will have the right to a 25% participation in any such additional leasehold."

Chesapeake’s CEO noted that the company has now off-loaded about $2.5 billion in drilling and expenses to new partners. In July, Plains Exploration (NYSE:PXP) coughed up $1.65 billion for a 20% share of Chesapeake’s Haynesville shale leasehold and BP ponied up another $1.7 billion for all of Chesapeake’s interests in 90,000 net acres in the Arkoma Basin. All told, since the beginning of the third fiscal quarter of 2008, Chesapeake has raised $4.2 billion in cash.

In August, Chesapeake moved about $2.25 billion in senior notes off its books and onto the books of a host of new subsidiaries. The company paid a consent fee to noteholders of $3.75/$1,000.

All this is an effort to shore up the company’s share price, after a nasty loss last quarter due to about $2.1 in mark-to-market hedging losses. But since volatility is the name of the game in energy markets, the company noted in its quarterly results that for the first 25 days of the third quarter, its hedges had gained $4.7 billion in value.

Unfortunately, commodity hedges don’t figure in much when it comes to investors’ actions. Selling off assets gets peoples’ attention. Chesapeake stock is down nearly 5% in early trading this morning.

Paul Ausick