Chesapeake to Sell Stake to Sinopec for $1.02 Billion

--Deal would help Chesapeake bridge cash shortfall

--Sinopec gains another foothold in U.S. oil patch

--Deal value less than what some analysts expected

Chesapeake Energy Corp. ( CHK ) agreed to sell a stake in an oil and gas field straddling the Oklahoma and Kansas border to Sinopec International Petroleum Exploration & Production Corp. for $1 billion in cash as the natural gas company tries to plug a gap in its cash flow.

Investors punished the company for fulfilling its nearly yearlong quest to sell at least a stake in its Mississippi Lime acres, however, saying Chesapeake cut too deep a discount in its asking price. Chesapeake shares were down 6.8% for the day.

Chesapeake is still reeling from a collapse in U.S. natural gas prices, while it attempts an expensive shift to more profitable oil drilling. The second-largest natural gas producer in the U.S. after Exxon Mobil Corp. (XOM) is selling assets to plug an expected $4 billion funding shortfall.

It would also increase state-owned Chinese oil and gas producers' rapidly expanding foothold in the North American oil patch. Sinopec, known formally as Sinopec International Petroleum Exploration & Production Corp., entered a $2.5 billion joint venture with Devon Energy Corp. (DVN) in January 2012 to drill in the Mississippi Lime. Cnooc Ltd. (CEO), meanwhile, just concluded a $15 billion takeover of Canada's Nexen Energy in the largest overseas acquisition by a Chinese state-owned energy company. In 2010 and 2011, Cnooc bought stakes in Chesapeake Energy's oil-rich shale fields in south Texas, as well as fields in Colorado and Wyoming.

The deal "moves us further along in achieving our asset-sales goals and secures an excellent partner to share the capital costs required" to develop this large area, said Chesapeake's chief operating officer, Steven C. Dixon.

Chesapeake and other natural gas producers have been hurt by a natural-gas glut resulting from their use of hydraulic fracturing, or fracking, to unlock gas from shale formations. The resulting production surge caused prices to collapse to a 10-year low, below $2 a million British thermal units last April. Chesapeake suffered shrinking revenues and was forced to sell more than $10 billion in assets last year to make ends meet.

Chesapeake CEO Aubrey McClendon had said in November the company marketed its Mississippi Lime acres for most of 2012 to Asian energy companies, but a potential deal suffered from worries about regulators being squeamish about selling more U.S. energy assets to companies run by the Chinese government.

The stamp of approval that the Canadian government put on Cnooc's $15 billion takeover of Nexen earlier this month might have calmed those fears, said China energy analyst Robert Gee, head of Gee Strategies Group LLC.

"The Nexen deal was obviously critical in communicating a signal--it gave a green light for upstream investment" from China, Mr. Gee said. Chesapeake's deal with Sinopec would give the Chinese company a 50% interest in 850,000 of Chesapeake's net oil and natural gas leasehold acres in the Mississippi Lime. Chesapeake will receive about 90% of proceeds upon close, expected in the second quarter, with the remainder to be paid after.

The Mississippi Lime has been a target for companies using fracking techniques in search of oil, but so far there has been only moderate success. Chesapeake said it averaged 34,000 barrels a day of oil and natural gas in its Mississippi Lime wells in the fourth quarter.

Analysts applauded Chesapeake for landing the deal with Sinopec. But they also voiced concern that the company's desperation to sell helped undercut the final price tag by as much as $200 million.

"The deal with Sinopec has to be somewhat disappointing for Chesapeake," Morningstar analyst Mark Hanson said.

Jefferies & Co. (JEF) advised Chesapeake on the deal.

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