Chesapeake Leaves the Fayetteville Play (CHK, BHP, BP, PXP, BCS, XOM, HK, POT)

It’s hardly news any more when Chesapeake Energy Corp. (NYSE: CHK) sells off more assets. This time is a little different, though, because of the buyer. BHP Billiton plc (NYSE: BHP) has agreed to pay around $4.75 billion in cash for all of Chesapeake’s assets in the Fayetteville shale gas play. The deal includes all 487,000 leased acres in the play and 420 miles of pipelines. Chesapeake’s production in the Fayetteville play is about 415 million cubic feet of gas per day.

Chesapeake had already sold a 25% stake in its Fayetteville play to BP for $1.9 billion. The company had also sold all its assets in the Arkoma basin and 20% of its assets in the Haynesville shale play to Plains Exploration & Production Co. (NYSE: PXP) for $1.65 billion. Chesapeake has also struck a five-year volumetric production agreement with Barclays Bank PLC (NYSE: BCS) that pulled in another $1.15 billion. Those deals siphoned off about 1 trillion cubic feet of production. China’s Cnooc Ltd. (NYSE: CEO) bought a 33% stake in Chesapeake’s Eagle Ford shale play for $1.08 billion late last year.

And Chesapeake’s not alone. Exxon Mobil Corp. (NYSE: XOM) paid $650 million to Petrohawk Energy Corp. (NYSE: HK) for Petrohawk’s Fayetteville assets.

With natural gas prices once again below $4/thousand cubic feet, the wonder is that anyone would acquire more natural gas reserves. BHP bought into the Fayetteville because the asset adds more than 10 trillion cubic feet of hydrocarbons to the company’s reserves base. Chesapeake was willing to sell because it would rather drill in either the Haynesville or Eagle Ford plays, where there is a larger percentage of higher-profit natural gas liquids.

It could be argued that BHP is looking for ways to spend its cash hoard. After failing to get control of Potash Corp. of Saskatchewan (NYSE: POT) for a deal valued at nearly $39 billion, BHP shareholders have been clamoring for increased payouts. The company has raised its stock buyback program to a total of $10 billion, but would like to do something with the cash that beefs up the company’s long-term prospects.

Chesapeake’s shares have set a new 52-week high this morning, giving the shares a range of $19.62-$32.61. That’s great for shareholders, but remember that less than three years ago Chesapeake shares topped out at around $67. Even if the company is able to chop its debt, which is still around $11 billion, the price it will have to pay to do so could put that $67 share price in the rear-view mirror for good.

Paul Ausick