Sinopec's U.S. Shale Deal Struck at Two-Thirds' Discount

China Petrochemical Corp.'s $1.02 billion deal with Chesapeake Energy Corp. (CHK) gives the second- largest Chinese energy producer a stake in a shale oilfield for less than one-third of its estimated value.

Sinopec, as the Beijing-based explorer is known, will take a 50 percent interest in 850,000 acres Chesapeake controls in the Mississippi Lime formation, the companies said yesterday in separate statements. The price equates to $2,400 an acre, less than the $7,000 to $8,000 at which Oklahoma City-based Chesapeake valued the asset in a July presentation.

The deal involves drilling rights across an area twice the size of New York City with wells that Chesapeake said were pumping the equivalent of 34,000 barrels of crude a day in the final three months of 2012. Sinopec will exercise more control over drilling decisions and costs than Chesapeake partners have on similar ventures because the Chinese company isn't handing over a lump sum to cover future drilling costs, said Mark Hanson, an analyst at Morningstar Investment Services in Chicago.

"This is the first joint-venture deal Chesapeake has ever done without a drilling carry," Hanson said in a telephone interview yesterday. For Chesapeake, "this looks pretty underwhelming," he said.

Chesapeake fell 6.8 percent to $19.11 in New York, the largest daily decline since Nov. 2. China Petroleum & Chemical Corp. (600028), the listed unit of the Sinopec Group, gained 0.5 percent to HK$8.80 in Hong Kong. The shares have increased 1.2 percent in the past 12 months, compared with a 6.6 percent gain in the benchmark Hang Seng index.

Chesapeake, which lost 24 percent of its market value in the past year, last week posted its biggest annual loss since 2009.

Asset Sales
Chesapeake agreed to sell more than $12 billion in oilfields and pipelines since the beginning of 2012 to plug a cash-flow deficit aggravated by low prices for natural gas, which accounts for about 80 percent of the company's output. Chesapeake failed to meet its asset-sales target last year and the prices received haven't matched the company's projections.

Chinese companies may pursue more U.S. energy investments after Cnooc Ltd. (883), a unit of China's largest offshore oil producer, this month won approval from the U.S. Committee on Foreign Investment to buy Nexen Inc. (NXY) for $15.1 billion. Chinese companies are buying stakes in North American exploration projects to gain expertise in penetrating unconventional formations such as shale amid a renaissance in U.S. oil production.

In Talks
Sinopec Chairman Fu Chengyu said in May his company had held talks with Chesapeake and others about investing in shale assets. Fu was seen sitting in a front-row seat at Chesapeake Energy Arena in Oklahoma City in June 2012 watching the Oklahoma City Thunder take on the Miami Heat in an NBA final, according to The Deal. The Thunder is partly owned by McClendon.

"While Chesapeake has many quality assets, Chinese oil companies care more about their drilling and shale-fracking technology," Laban Yu, a Hong Kong-based analyst at Jefferies Group Inc. (JEF), said in a telephone interview. "The reason Chinese oil companies have gone after Chesapeake in the past year was also because they wanted to apply the technology to tap the world's No. 1 shale gas reserves in China."

Cnooc has invested $1.65 billion with Chesapeake since 2010.

Auctioning Fields
In the Sinopec deal, the per-acre price lags the $4,425 and $2,750 SandRidge Energy Inc. (SD) received in successive Mississippi Lime deals in 2011, said Michael Kelly, an analyst at Global Hunter Securities LLC in Houston. Neither of the SandRidge sales included producing wells, he said.

Chesapeake is selling some of its most-promising Mississippi Lime acreage, Hanson said. Unlike the SandRidge transactions in the same formation in 2011, the land involved in Chesapeake's sale already has been heavily drilled and assessed as "the heart of the Mississippi Lime," he said.

"This is the good stuff they're parting with," Hanson said. "But they need money so there's nothing you can do about it." Prior to today's announcement, Chesapeake's total holdings in the Mississippi Lime amounted to about 2 million acres.

Chesapeake is aiming to raise $4 billion to $7 billion this year from asset sales, according to a presentation published on the company's website yesterday.

"Chesapeake is not getting a very competitive price for its assets in this transaction," James Sullivan, an analyst at Alembic Global Advisors in New York, said in a note to clients.

Tripled Output
Chesapeake reported on Feb. 21 that Mississippi Lime production tripled during the fourth quarter from a year earlier. Net proved reserves were equivalent to about 140 million barrels of oil as of Dec. 31, the company said today.

Chesapeake Chief Executive Officer Aubrey McClendon agreed last month to leave the company he co-founded in 1989, citing "philosophical differences" with the board that he didn't detail. McClendon's dismissal, which takes effect April 1, wasn't related to an internal inquiry that found no wrongdoing in his use of stakes in company-owned wells to obtain more than $800 million in personal loans, the board said.