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ExxonMobil Calls Chesapeake Purchase 'Strategic'

Chesapeake Energy Corp. last week clinched a trio of natural gas and oil transactions in unconventional U.S. fields that together would give the company total proceeds of $2.6 billion in cash. Among them was the sale to ExxonMobil Corp. of 58,400 acres in the Texoma Woodford Shale for $590 million in cash.

CEO Aubrey K. McClendon called the Texoma Woodford sale "nonstrategic...and we are happy to unlock the value of these assets for our shareholders..."

However, for ExxonMobil, the deal, expected to close by the end of the month, is "strategic," a spokesman said. The leasehold, which includes acreage in Oklahoma's Bryan, Carter, Johnston and Marshall counties, currently produces 25 MMcfe/d net.

In a meeting with analysts in March ExxonMobil's management team highlighted the Woodford Shale and said the company had more than tripled its position to about 172,000 net acres (see NGI, March 12). The play has the potential to produce 70,000 boe/d, according to the supermajor.

ExxonMobil subsidiary XTO Energy Inc. now has 10 rigs running in the area. According to its 2011 annual report, the Woodford in southern Oklahoma's Ardmore Basin is ExxonMobil's "most active" emerging liquids-rich shale play. "By year-end 2011 ExxonMobil established a leadership position...and tripled both operated rig count and production. In addition, 31 Ardmore wells were brought on production during the year."

In the biggest transaction by value announced by Chesapeake last week, the Oklahoma City-based driller sold preferred shares in its Cleveland and Tonkawa plays for $1.25 billion.

The preferred shares of newly formed subsidiary CHK Cleveland Tonkawa LLC (CHK C-T), as well as a 3.75% overriding royalty interest in the first 1,000 new net wells to be drilled, were sold to an investment group led by GSO Capital Partners LP, an affiliate of the Blackstone Group. CHK C-T owns about 245,000 net leasehold acres in the Cleveland and Tonkawa liquids-rich tight sands plays in Oklahoma's Roger Mills and Ellis counties. The purchasing group included TPG Capital, Magnetar Capital and EIG Global Energy Partners. Chesapeake retained all of the common equity interests in the subsidiary.

Chesapeake also completed an estimated $745 million ($4.68/Mcf) 10-year volumetric production payment (VPP) for producing assets in the Anadarko Basin's Granite Wash.

An affiliate of Morgan Stanley bought the VPP for producing assets in the Granite Wash, including about 160 Bcfe of proved reserves and 125 MMcfe/d net of current output. Chesapeake retained drilling rights on the properties above and below the currently producing intervals, as well as those outside of the existing producing wellbores.

Including this transaction, Chesapeake said it has completed 10 VPP transactions since December 2007 and sold about 1.37 Tcfe of proved reserves for combined proceeds of around $6.4 billion ($4.65/Mcfe), which it said was 300% more than its current drilling and completion costs per Mcfe.

Although Chesapeake has been criticized for buying more assets than its balance sheet can handle, Oppenheimer & Co. energy analyst Fadel Gheit noted that the company can raise cash when it's needed.

"Chesapeake has some of the best shale acreage in the U.S., and when they need money they can easily find a buyer," said Gheit. "They are not running out of options."

Chesapeake plans to monetize other holdings this year, including some East Texas properties in the Woodbine play. Expected proceeds from selling nonstrategic assets are expected to total $8-10 billion, according to McClendon.

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