CHK Scoops Eagle Ford Acreages - Analyst Blog

Chesapeake Energy Corporation (CHK) signed a deal to acquire 23,180 net oil and natural gas leasehold acres in the Eagle Ford Shale area in south Texas from Australia's Antares Energy Ltd. (AZZ) and its partner, San Isidro Development Company. The acquisition will cost the company almost $200 million.

According to Antares, Chesapeake shelled out $8,628 per acre for its transactions in the area. The deal amount thereby represents a premium of more than 20% over the average value of last year's transactions. However, Chesapeake declined to comment on this.

The Eagle Ford is a shale rock formation covering many counties in South Texas. This formation happens to be the hottest shale play this year and has attracted companies interested in tapping huge pools of hydrocarbon in McMullen County, Texas as well as natural gas in La Salle County, Texas. Recent advancements in drilling technology are also expected to provide a major boost to U.S. energy supplies.

In October, CNOOC Ltd (CEO) paid $2.16 billion for a stake in Chesapeake's Eagle Ford acreage and paid more than $10,000 per acre. Management is actively developing this large domestic oil and natural gas resource with CNOOC's assistance, reducing oil imports over time.

Companies like Marathon Oil Corp. (MRO) also entered the Eagle Ford by acquiring about 17,000 acres in Wilson and Atascosa counties in Texas from Denali Oil & Gas for $10 million.

In the recently concluded quarter, Chesapeake's earnings came in above our expectations due to a whopping 23% increase in production volumes and higher prices. The company also guided full-year production growth of 13%, and 18% for both 2011 and 2012. Although the company's production profile is fairly natural gas weighted, approximately 60% of this year's growth is expected to come from increased liquids production. For 2011 and 2012, liquids production is expected to be 80% and 60%, respectively.

We appreciate the company's focus on shale gas plays as well as liquids. These are expected to yield high returns going forward. Though the increasing focus on liquids is commendable, the ultimate benefit from it is a time consuming story. Moreover, given approximately 90% of the company's reserves and production is natural gas weighted, performance of the stock remains tentative.

We are currently maintaining our long-term Neutral stance on Chesapeake shares. The company holds a Zacks #3 Rank (short-term Hold rating).