Chesapeake Energy Can't Get the Chinese to Overpay for Every Acre

Chesapeake may still get the NOC premium with the Mississippian Lime joint venture, and the Sinopec chatter may yet be right if it is Chesapeake's JV partner. Though Chesapeake has also floated the possibility that Mississippian assets could be sold outright.

Chesapeake also had the problem of defining value for assets within its larger publicly traded business. Selling shale boom drilling businesses outright to mining giant BHP Billiton (BHP) , as Petrohawk did, or to Statoil (STO) , as in the case of Brigham Exploration, is a type of foreign buyer that won't raise the political rhetoric to a decibel level. It's also selling a publicly traded company where the premium is transparent being tied to existing stock value, rather than assets within a far-flung land drilling regime like Chesapeake's.

When McClendon initially presented the Permian sales plan, he said, "I think the returns from our projects in the Permian are first-rate, and I think that is why you see so much industry interest in the Permian, and frankly why you see so much investor interest. Just looking at the valuation of some companies that are pure Permian basin players, we are tempted to spin out our Permian asset and just make it a separate company. But at the end of the day, it is probably best for our overall goals this year to work the JV approach and also to work the 100% approach as well."

Chesapeake's ace-in-the-hole is that it can always sell something. If it got into its current mess by buying too much on leverage, it can always sell when push comes to shove as it has had to do in 2012. But you can't get the Chinese to pay up for every acre when the "national interest" trumps your need to raise cash. The best, or at least most aggressive buyers, don't even have a seat at the table when the "100% approach" is required.

Chesapeake said it went with the 100% approach because it wants out of the Permian for good, as it focuses on basins where it has No. 1 or No. 2 positions. So the Permian may be the exception to the rule in terms of the "big premium" shale M&A story pumped by bankers and supported by foreign state-run oil companies.