Asset Sales Galore Coming for Chesapeake

Despite having some of the best assets in the natural gas business, Chesapeake Energy (NYSE: CHK) has become the poster child for the type of company that investors should give a wide berth. Among the problems which ail Chesapeake are very questionable corporate governance, large amounts of debt both on and off the balance sheet, strained liquidity and murky accounting. No surprise then that the company's stock has fallen roughly 45 percent in the past six months.

Chesapeake Energy, the second-biggest natural gas producer in the United States, now has one choice to survive...it will have to liquidate some of the juiciest energy assets in the country. That is where this story gets interesting for investors in the sector as its rivals look to scoop up some of Chesapeake's prime assets at a good price. In fact, industry analysts believe there are at least $25 billion in valuable acreage that Chesapeake owns which should find eager buyers.

The company's principal assets are oil and gas leases covering roughly 15 million acres in key areas all across the country including Texas, Louisiana, Oklahoma and Pennsylvania. Chesapeake is the largest or second-largest leaseholder in many of the most promising in the US for producing shale gas and oil that have been opened by advances in drilling technology.

Even before the recent problems came to a head, the company had planned to make some assets sales as it has done the past several years. The biggest planned deal is the sale of 1.5 million acres of leases in the Permain Basin oil fields of west Texas and eastern New Mexico. It is believed this sale should fetch the company at least $6 billion since these fields hold much more oil than they do gas.

The most obvious possible buyer for these assets is Anadarko Petroleum (NYSE: APC) which is Chesapeake's partner in many wells in the Permian Basin. Its CEO Al Walker has publicly stated Anadarko plans to “take a look” at those assets. Another possible buyer for these assets is Occidental Petroleum (NYSE: OXY). This company is the biggest oil producer in the Permian Basin. In the past, it showed interest in these assets, offering Chesapeake about $3.5 billion for it (the offer was rejected).

The second planned disposal is a joint venture for its 2 million acres in the Mississippi Line region of Oklahoma and Kansas. This acreage, like many of Chesapeake' other assets, requires significant capital spending to bring it into full fruition. The company's capital spending has exceeded cash flow each quarter since October 2003, according to Bloomberg. This is the one of the main reasons behind the company's high debt burden and why ratings agency Fitch recently said Chesapeake's cash flow shortfall this year may reach $10 billion.

With much capital required, buyers of Chesapeake's assets are going to have to be some deep-pocketed companies. One such company which comes to mind immediately is Chevron (NYSE: CHV). Unlike some of its peers in the industry like ExxonMobil, it has been very slow in acquiring US shale reserves and has to date nearly missed the shale revolution occurring in the United States. Chevron's pockets are even deep enough for it to catch up quick and acquire the whole of Chesapeake Energy if it so desires.

Another possibility is an overseas natural resources company with a strong interest in US energy assets. That company is BHP Billiton ADR (NYSE: BHP). Its management has been trying to shift the company away from a reliance on metals mining and more towards a focus on energy assets around the globe. BHP recently announced a reduction in its capital spending on mining projects. Investors will recall that BHP, which had already bought some US energy assets, spent $12.1 billion to acquire Petrohawk Energy in July 2011. The acquisition of Petrohawk's shale assets in Texas and Louisiana moved BHP into the top 10 of oil and gas companies and it is looking to expand even more in the US.

What will happen to Chesapeake? It could try a piecemeal approach – both selling and buying assets. But this strategy will do the company little good...it will be just running in place with a heavy debt load tied around its neck. Despite its reluctance, management will likely have to put the whole company up for sale sooner or later.

This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.