Today’s news that Chesapeake (CHK) is going to sell $12BN in assets in response to continued weak natural gas prices looks like good news. Depending on the buyers, it’s possible that the new owners could have a sufficiently long horizon that they won’t need to drill just to generate near term cashflow to finance debt payments. And it may also demonstrate that there are many buyers for natural gas assets in spite of the lousy current economics caused by excess supply. Natural gas is beginning to supplant coal as the marginal fuel of choice for electricity generation, and companies like Exxon Mobil and BP forecast an increasing share of power generation will come from natural gas.
So the news is mildly positive for some of those with low costs of production, such as Devon Energy (DVN), Southwestern Energy (SWN) and Comstock Resources (CRK). However, CHK is weak, since the prospect of shedding around a third of its assets when natural gas is trading at $2.50 reveals some poor financial planning by Aubrey McClendon and his team. The expectation that CHK may have to sell more liquids-focused properties is further disappointment for owners of CHK. It shows that debt is bad and low production costs vital if you’re going to earn a decent return on investment in this sector. CHK’s actions are helpful for just those types of company, but not for CHK itself.
Disclosure: Author is Long DVN, CRK, SWN
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