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

Though, on its most recent earnings conference call, Chesapeake CEO Aubrey McClendon declined a request from Bank of America Merrill Lynch analyst Doug Leggate to update the outlook on deal value. "Aubrey, I don't suppose you would care to comment on the $4 billion to $6 billion original range that you gave relative to what you think you are going to realize?," Leggate asked, with McClendon replying that when the company had final numbers to report it would do so.

Wells Fargo analyst David Tameron was one of the analysts to write on Wednesday that the Permian deal came up short of expectations.

Phil Weiss, analyst at Argus Research, said the Permian brought in less than expected and yet the midstream sales raised more money than expected, so there's a tradeoff and Chesapeake continues to dig itself out of the hole it dug for itself. Nevertheless, "The price looks more reasonable for the buyers than seller," Weiss said, adding "This is U.S. property, so you cant get the same NOC premium."

There are plenty of caveats to the market's read on the deal as slightly disappointing.

For one, the Permian is the size of some states, at 250 miles by 300 miles. The Permian is also a 100-year old drilling region where not all wells are producing equally or on the same life cycle -- it's essentially a legacy of the Texas vertical drilling boom of a century ago that has found new life in the age of horizontal, hydraulic fracturing.

Also, Chesapeake still holds roughly 470,000 net undeveloped acres in the Midland section of the Permian that can still be sold, and at an average of $3,000 per acre, for example, that would bridge a significant part of the gap in the expected deal pricing.

RBC estimates that the Shell acreage was sold at sub-$3,000 and the Chevron acreage around $3,000. Either way, it's a "blunt" valuation instrument that does seem low compared with other Permian deals ranging from $5,000 per acre to as much as $10,000 per acre. Even if RBC Capital Markets analyst Scott Hanold thinks the "blunt" approach got too much market attention on Wednesday, he said even if the market had a perfect formula for assessing the deal, it would probably seem "light" on price.

That's no surprise given the position of weakness that everyone should have known Chesapeake was negotiating from. It's not simply the cash crunch but the specific short-term loan from Goldman Sachs and Jefferies provided earlier this year when Chesapeake was facing market fears it was in a "death spiral," a loan it now needs to use the deal proceeds to pay off.