Chesapeake Energy (CHK) announced that it had sold 1,500 wells and the drilling rights to 413,000 acres to Southwestern Energy (SWN) today, and clearly the market thinks Chesapeake got a great price for its assets. It’s gained 14% to $20.26, while Southwestern Energy has dropped 8.2% to $32.77.Associated Press
SunTrust Robinson Humphrey’s Neal Dingmann and team estimate that Southwestern paid $9,625 an acre for the land, when previous deals in West Virginia had come in below $5,000. Obviously, Chesapeake got a good price, which also helps explain why Magnum Hunter Resources (MHR), Gulfport Energy (GPOR), and Consol Energy (CNX), among other West Virginia players, are also getting a bounce today.
Topeka Capital markets’ Gabriele Sorbara thinks Chesapeake’s deal means Magnum Hunter has 40% upside:
We believe Magnum Hunter has superior assets situated in the core Utica and Marcellus; however, this transaction has positive implications at the implied valuation. Based on our calculation, the assets were acquired for $13,015 per flowing Mcfe/d and $8,947 per acre (adjust for acquired production). An average of these transaction metrics on Magnum Hunter's production and acreage implies upside of 39.2%. We reaffirm our Buy and $10 price target. By early next year, we believe management will have transitioned to a pure-play Appalachia company with an improved balance sheet/capitalization and greater transparency on its Utica potential. Further, with its scale in the core Marcellus/Utica shale, we believe Magnum Hunter makes for an attractive takeout over the next 12 months.
Shares of Magnum Hunter have gained 3.3% to $4.69, while Gulfport Energy has advanced 4.6% to $46.11, and Consol Energy has risen 2.6% to $34.54.