Chesapeake Energy Corp. (CHK:US), the U.S. natural gas producer that almost ran out of money last year, is spending $1.71 billion to expand access to oil-soaked shale in Wyoming and buy back preferred shares that were a drain on cash.
Chesapeake will repurchase $1.26 billion of preferred shares of its CHK Utica unit that burned through $75 million a year in dividends, enough to drill more than a dozen shale wells, the Oklahoma City-based company said today in a statement. Separately, it will pay $450 million to closely held RKI Exploration & Production LLC as part of a land swap that will increase Chesapeake’s holdings in the prolific Powder River Basin by an area twice the size of San Francisco.
Chief Executive Officer Doug Lawler has been shifting from gas drilling to more lucrative oil production and untangling complex financing agreements since replacing Chesapeake co-founder Aubrey McClendon 13 months ago. The swap with RKI adds the equivalent of 4,500 barrels of oil a day to production and 66,000 net acres in an area that may contain the equivalent of 2 billion barrels.
The transactions represent “another broad stroke” in Lawler’s makeover of a company that outspent cash flow in 21 of the past 23 years, Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York, said in a note to clients today.
“The $1.7 billion outlay may raise eyebrows but we support the move to minimize opacity on the balance sheet, even if it delays a credit upgrade to investment grade,” Rezvan said.
Chesapeake originally sold the preferred shares in some of its Utica shale prospects in Ohio in 2011 to raise cash for drilling and spread the risk of exploring a geologic formation that hadn’t been widely mapped or tested at the time.
With an annual 7 percent distribution and a 3 percent overriding royalty interest, the preferred shares were Chesapeake’s highest-cost financing tool, the company said. The original group of preferred holders included Magnetar Capital, Blackstone Group’s GSO Capital Partners LP and EIG Global Energy Partners LP.
Lawler has been shedding gas fields, cutting capital expenditures and exiting some of the byzantine financial structures favored by his predecessor McClendon, who was fired amid a cash crunch and investor revolt. The RKI deal is expected to close next month, according to the statement.
“We are very pleased with the performance of our Utica assets, and as we continue to execute on our strategy of eliminating financial complexity,” Chesapeake’s Chief Financial Officer Domenic Dell’Osso,’’ said in the statement. “This is an opportune time to repurchase the remainder of the CHK Utica preferred shares at a price that is accretive to net present value.”
Chesapeake fell 0.8 percent to close at $27.06 in New York. It has risen 5.4 percent this year.
The company said it received an average price of $85.23 for each barrel of crude sold during the second quarter, up 0.2 percent from the first three months of the year. Chesapeake’s gas fetched $2.45 per thousand cubic feet, down 25 percent from the first quarter, amid a glut in the Marcellus shale region in Appalachia. The company is scheduled to report second-quarter results on Aug. 6.
Oklahoma City-based RKI is backed by private-equity giant First Reserve Corp.
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