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Chesapeake Takes Partner in Utica Play

Two transactions to monetize a portion of Chesapeake Energy Corp.'s 1.5 million net acres in the Utica Shale of Ohio are expected to give the independent about $3.4 billion in proceeds, CEO Aubrey McClendon said late Thursday.

In the biggest transaction, the Oklahoma City-based producer has a letter of intent (LOI) with an undisclosed "international major energy company" under which the foreign company would acquire an undivided one-quarter stake in 650,000 net acres of the Utica play in the wet natural gas area. Of the acreage to be provided through the joint venture (JV), Chesapeake owns about 570,000 net acres while 80,000 net acres are owned by Houston-based EnerVest Ltd. and its affiliates (see related story).

The JV transaction, which would cover all or a portion of 10 counties in eastern Ohio, is worth about $15,000/acre net, or about $2.14 billion to Chesapeake and $300 million to EnerVest.

"Through the industry JV, we will be able to recover more than our total leasehold investment in the entire Utica Shale play while only selling approximately 142,500 net acres of our 1.5 million net acres of Utica Shale leasehold," said McClendon.

Close to $640 million is to be paid to Chesapeake by the foreign investor when the transaction closes, with another $1.5 billion paid in the form of a drilling and completion cost carry, which is expected to be completed by the end of 2014.

Chesapeake would operate the JV and would conduct all of the leasing, drilling, completion, operations and marketing activities for the area of mutual interest (AMI). The LOI provides that the JV partner would have the option to acquire a one-quarter stake of any additional acreage acquired by Chesapeake in the AMI and the option to participate for a one-quarter interest in midstream infrastructure related to production generated from the assets. Closing is expected by mid-December.

In the second transaction with EIG Global Energy Partners, Chesapeake said it completed the sale of $500 million of perpetual preferred shares of its newly formed entity CHK Utica LLC to EIG. Chesapeake plans to sell up to $750 million of additional CHK Utica preferred shares to other investors, including limited partners of EIG, by the end of this month. CHK Utica owns about 700,000 net leasehold acres within the EIG AMI in the Utica Shale, which covers 13 counties in eastern Ohio.

"Through the financial transaction led by EIG, our drilling program in CHK Utica is almost entirely funded for the foreseeable future (including cash flow from anticipated production)," said McClendon. "We have achieved very strong initial drilling results in the wet natural gas and dry natural gas areas of our Utica Shale play and are beginning to accelerate our evaluation of the oil area of the play, which the EIG transaction will help enable."

Chesapeake holds all the common interests in CHK Utica. The company's average net revenue interest on its Utica Shale leasehold is about 83%, which it said compares favorably to net revenue interests in the Haynesville, Barnett and Eagle Ford shale plays of 75%.

As part of the EIG transaction, Chesapeake committed to drill a minimum of 50 net wells a year through 2016, up to a minimum cumulative total of 250 net wells.

Chesapeake said it should have "considerable operating and financial flexibility in fulfilling the drilling commitment because the company's planned Utica Shale drilling program for the years ahead involves a significantly higher rig count than the approximate 10-rig drilling program required by the terms of the CHK Utica preferred shares investment."

Chesapeake is no stranger to acquiring significant shale leaseholds and then bringing in foreign partners to help develop them. A little over a year ago, China's CNOOC Ltd. (China National Offshore Oil Corp.) agreed to buy a one-third stake in Chesapeake's 600,000 net acres in the Eagle Ford Shale in South Texas (see Shale Daily, Oct. 12, 2010).

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