Parallel Petroleum, which holds a 35% stake in 34,500 acres of the Barnett Shale, has struck a deal that allows its leasehold partner, Chesapeake Energy Corp., to take care of all of the drilling and development commitments in the play through 2016.

Parallel faced penalties if it failed to fund its required share of drilling on the leases, said President Larry Oldham. Chesapeake is expected to drill about 50 wells this year on the leasehold, which would have cost Parallel around $1 million per well, he said.

“We can’t afford to keep up with Chesapeake,” Oldham said during a conference call earlier this month. “You’re going to see more and more of these transactions. We’re in a very difficult environment” because natural gas prices have dropped and service costs have remained relatively high, he said.

With the farmout to Chesapeake, “our 2009 capital requirements for the Barnett Shale gas project have dropped 80% to $10.2 million for the estimated completion costs of the 31 gross (9.49 net) wells that were in progress at year-end 2008,” Oldham said.

Under the farmout agreement, for all wells drilled on Parallel’s Barnett Shale leasehold from Nov. 1, 2008 through Dec. 31, 2016, Parallel would assign Chesapeake 100% of the leasehold. For each project, Chesapeake would be entitled to receive all revenues from Parallel’s interest until Chesapeake receives revenues totaling 150% of the drilling, completion and operating costs incurred to fund Parallel’s stake. After Jan. 1, 2017, Parallel would pay all costs and receive all revenues attributed to its stake.

The Midland, TX-based independent retained all of its stakes in 90 gross (22.4 net) producing wells and 31 gross (9.49 net) wells that were in progress in the Barnett Shale.

Along with cutting back in the Barnett Shale, Parallel slashed its planned capital expenditure (capex) plans for this year. Last November the producer announced it would spend $118.8 million this year for drilling and exploration, mostly in onshore plays. However, Parallel now plans to spend $29.1 million — 76% less than it announced three months ago. Besides the reduced activity in the Barnett Shale, Parallel also is scaling back activity in New Mexico’s Wolfcamp gas play and in Permian Basin oil projects.

“During 2009 our top priorities are to maximize liquidity and maintain financial flexibility by funding our $29.1 million capex budget out of operating cash flow, while positioning ourselves to capitalize on potential growth opportunities,” said Oldham. “Due to the current disconnect between low oil and natural gas prices and the relatively high cost of goods and services, we are also reducing our 2009 capex budget in our Permian oil projects and our New Mexico Wolfcamp gas project, all of which are under company control.

“We will continue to monitor commodity markets, service costs, economic conditions and other factors and may further adjust our $29.1 million 2009 capex budget based upon product prices, service costs and workover project inventory, among other factors. In the meantime, these measures will help us through these challenging times.”

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