Chesapeake Looking to China Buyer (CHK, SNP, CEO, DVN)

An asset sale to a Chinese buyer would not be a first for Chesapeake Energy Co. (NYSE: CHK), but if a reported deal does happen, it would likely be the largest such deal the beleaguered gas company has ever made. The Financial Times has reported that Chesapeake is in discussions with Sinopec, formally China Petroleum & Chemical Corp. (NYSE: SNP), concerning the sale of billions of dollars worth of assets.

Chesapeake has already sold more $3 billion in assets to China’s Cnooc Ltd. (NYSE: CEO), including a $2 billion deal for a stake in the Eagle Ford shale play to and a $1.1 billion stake in Chesapeake’s assets in the Niobrara shale play that straddles the Wyoming-Colorado border.

Sinopec paid $900 million in cash and agreed to pay another $1.6 billion in development costs to Devon Energy Corp. (NYSE: DVN) earlier this year for a stake in shale gas plays in Ohio, Oklahoma, Louisiana, Michigan, and the midcontinent.

Chesapeake has said it will sell $11.5 billion in assets this year to help prop up its cash flows and reduce the company’s debt. After shedding its pipelines earlier this month for about $4 billion, the principal asset the company has left is leases on 1.5 million acres of the Permian Basin in West Texas and New Mexico. The assets could be worth up to $6 billion, and have been attracting a lot of interest from prospective buyers according to the FT.

While Sinopec could undoubtedly raise the capital to pay for Chesapeake’s Permian Basin assets, the company probably would not try to buy every lease that is on offer. Sinopec’s chairman, Fu Chengyu, was the CEO at Cnooc when that company offered to buy Unocal for around $20 billion. The outcry against the deal forced Cnooc to withdraw the offer. Since then, Chinese investments have been scaled back and none has run into any significant resistance.

Chesapeake’s shares are down slightly in the pre-market this market, at $19.00 in a 52-week range of $13.32-$35.75. An investigation into the company’s business practices by the attorney general of Delaware appears to trump the possibility of a significant asset sale.

Paul Ausick