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Last week’s announced joint venture between Chesapeake Energy Corp. (NYSE: CHK) and Sinopec International Petroleum Exploration and Production Corp. to develop 850,000 gross acres in the Mississippi Lime play comes as no surprise to market observers, a market analyst report states.
A report from Raymond James & Associates Inc. states that the negotiations over the deal stalled in part because valuations in the play have declined. Under the terms of the deal last week, Sinopec will pay Chesapeake $1.02 billion, 93% upon closing, to form a joint venture in 850,000 gross acres in the Mississippi Lime acreage of northern Oklahoma. The acreage was producing around 34,000 barrels of oil equivalent (BOE) per day in the fourth quarter 2012 and has about 140 million BOE of net proved reserves.
Chesapeake will remain the operator in the acreage.
“The Mississippi Lime JV has been anticipated for several months. Unfortunately, over that time frame, market expectations of the play have deteriorated, which caused the sale process to drag on and valuations to decline. Even given that backdrop, the deal failed to exceed the already low market expectations,” according to Raymond James.
After backing out the value of the producing acreage, which is about $800 million, Raymond James estimated that the deal values the remaining acreage between $600 and $700 per acre. “Market expectations were obviously much higher,” the report states.
Raymond James noted that Chesapeake had additional Kansas acreage that was excluded from the deal, which is a reflection of the current appetite for that area. The industry is awaiting more results to delineate that portion of the play, Raymond James reported.
Chesapeake’s stock is trading around 7.4 times its projected EBITDA (earnings before interest, taxes, depreciation and amortization) for 2013, which is above the historical upstream range of five to seven times projected EBITDA, Raymond James reported.
The deal does not change Raymond James’ “Market Perform” rating for Chesapeake, an assessment that means the company’s stock should perform generally in line with the S&P 500 index during the next 12 months.
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