Did Chesapeake Energy Corporation (CHK) Get Ripped off in the Sinopec Shanghai Petrochemical Co. (ADR) (SHI) Deal?

Over the past year or so, Chesapeake Energy Corporation (NYSE:CHK) has been busy selling off several of its oil and gas assets, as the nation’s second-largest natural gas producer tries to raise much-needed cash.

It recently sold off some of its interest in a sizable portion of its Mississippi Lime acreage to a major Chinese oil company. Though the deal brought in a little over $1 billion, the price Chesapeake Energy Corporation (NYSE:CHK) received per acre was just a fraction of what the company said the acreage was worth last year.

This raises some serious concerns. Did Chesapeake Energy Corporation (NYSE:CHK) get ripped off? Or does the transaction simply serve as a reminder that beggars can’t be choosers, or distressed sellers can’t expect to receive a desirable price?

Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI)-Chesapeake joint venture
Last month, Chesapeake Energy Corporation (NYSE:CHK) struck a deal with China Petroleum & Chemical Corp (ADR) (NYSE:SNP), otherwise known as Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), that will give the Chinese energy producer a 50% interest in a substantial chunk of the company’s acreage in the Mississippi Lime formation.

Under the terms of the agreement, Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) will be getting a 50% stake in some 850,000 net acres controlled by Chesapeake, which comes out to a price per acre of less than $2,400 – less than a third of the $7,000-$8,000 price range that Chesapeake claimed the land was worth in a presentation last July.

The transaction price appears even more underwhelming when you consider that the acreage Chesapeake is parting with includes producing wells and a large amount of booked reserves. Production from the 850,000 net acres averaged roughly 34,000 barrels of oil equivalent per day in the fourth quarter, of which 45% was oil, 46% natural gas, and the remaining 9% was natural gas liquids production. According to Chesapeake’s year-end estimates, the land contains net proved reserves totaling about 140 million barrels of oil equivalent.

A poor showing for Chesapeake
While I wasn’t expecting Chesapeake to receive the lofty per-acre price that the company claimed the acreage to be worth, the fact that it got just a third of the price it was expecting is a bit surprising, especially considering that Aubrey McClendon arranged front row seats for Sinopec Chairman Fu Chengyu at game two of the NBA Finals last June. Here’s a picture of him at Chesapeake Energy Arena in Oklahoma City (that’s him to the right of Derek Fisher).

It’s a little puzzling that McClendon couldn’t use his charm to convince the Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) chairman to fork over at least a few hundred more dollars more per acre for the Mississippian assets. I mean, c’mon, from $7,000-$8,000 per acre to just under $2,400 per acre? For acreage that was producing 34,000 barrels of oil equivalent per day in the fourth quarter? That’s a pretty sorry showing. But maybe the Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) chairman’s just not a big fan of basketball.