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The Roundup

China Company Interested in Chesapeake Assets

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Posted 06.20.12

Photo courtesy Wikipedia.

Sinopec, an oil and gas group out of China, has its eyes on Chesapeake Energy Corp., The Financial Times reported. The company’s top executive, Fu Chengyu, made a visit to Oklahoma recently as his company considers spending billions of dollars on Chesapeake’s assets. The “prize asset,” the Times reported, is its leases on 1.5 million acres in the Permian Basin, “one of the most coveted areas of the US for oil development,” which could fetch more than $6 billion, according to analysts.

From the Times:

By buying assets rather than making a bid for the company itself Sinopec hopes to minimise the sort of political backlash that forced Cnooc to drop its $18.5bn bid for Unocal in 2005, bankers and oil executives say.

Chesapeake Energy has been hit hard by low natural gas prices in the US and is in the midst of an asset disposal programme to help reduce its debt. Its shares have fallen 25 per cent from their March peak.

Forbes reported that Sinopec could be “the best Chesapeake ‘fit’ given its desire to grow its global acreage and diversify from the raw end of global energy markets: refining and distribution.”

…(T)he bottom line is China has the cash to invest through the cycle and keep US unconventional production going. Without Chinese strategic investment, it’s highly unlikely the US would attract further international capital into shale plays given prevailing Henry Hub prices unless they firm to around $4-7/Mmbtu. Far higher returns can be had elsewhere. …

Obviously much will depend on what Sinopec is willing to offer, but the downside risks of a loss of US jobs, economic momentum and a reduced American stake in global hydrocarbon fundamentals is well worth considering.

Earlier this year, Sinopec struck a $2.5 million deal with another Oklahoma City-based energy company, Devon, “to invest in five new development areas from Ohio to Alabama,” according to The Financial Times. “Devon’s deal with Sinopec also reflects Chinese companies’ hopes that techniques pioneered in the US could be used to develop China’s own resources. Sinopec is taking one third of Devon’s stake in the five oil projects but will pay 80 per cent of the development costs, or up to $1.6bn, as well as paying $900m in cash,” the Times reported in January.

Meanwhile, Ohio’s attorney general, Mike DeWine, is investigating allegations that Chesapeake committed fraud “that might have led to investment losses for Ohio pension funds,” Bloomberg Businessweek reported. In a letter to Ohio Citizen Action, an environmental advocacy group, DeWine wrote:

My office is reviewing the retirement system trading data in order to calculate possible losses attributable to the alleged fraud. Please be assured that we will monitor the situation and take appropriate action if it appears that Ohio resources have been lost due to fraudulent activity.

Yesterday, Chesapeake announced it would lay off 70 employees in North Texas’ Barnett Shale—8 percent of area workers there—where it is the second-largest natural gas producer. An additional 60 workers will be relocated from the company’s “gleaming” Fort Worth regional office building to a “site in downtown Fort Worth,” as the company entertains purchase offers for the building, Bloomberg reported.

Aubrey McClendon, CEO of Chesapeake Energy Corp. Photo courtesy Chesapeake.

The blog Downtown on the Range posted in defense of Chesapeake’s CEO Aubrey McClendon (he is still CEO, although the blog incorrectly reported a replacement to the post would be announced this week; his replacement as chairman of the board is expected to be announced this week), calling McClendon a “hometown hero” and urging him to consider a bid for mayor.

“The point is that if you are looking for one individual to credit the entire turned fortune of OKC in the last decade, I would truly suggest looking no further than Aubrey K. McClendon, more than any political leader, more than any other business leader, and so on,” “NR” wrote. “The going has gotten rough for him, and I personally hope he can bounce back and get redemption with CHK and continue doing what he is so good at – competing and cornering the natural gas industry. However, if things don’t work out with CHK, and I’m honestly just not sure what continued leadership role is left for him after finding a new CEO and Chairman, I really think he needs to follow his real passion and just go into local politics.”

Even Christopher Helman of Forbes thinks Chesapeake should “give Aubrey McClendon one more chance.”

Give McClendon the opportunity to redeem himself. He loves the company like his own child. He knows the assets, he knows the people, he knows the systems. Let him sort out the problems and deleverage the company. Give him until next year’s annual meeting. If he drags his feet, boot him.

Holly Wall, News Editor