Continuing its rapid accumulation of producing properties, Chesapeake Energy on Tuesday announced it had paid $425 million for privately-held Greystone Petroleum LLC, which owns 214 Bcfe of proved reserves and 16,100 gross acres of leasehold in the Sligo Field in Bossier Parish, LA. The field has produced 1.6 Tcfe of gas.

The purchase also includes 51 Bcfe of probable and possible reserves and production of 45 MMcf/d, which Chesapeake hedged at $6.25/MMBtu through June 2005.

The purchase price breaks down to about $1.68/Mcfe after allocating $65 million to unevaluated leasehold and midstream gas assets, the company said. Including anticipated future drilling costs for fully developing the reserves, the company estimates that its acquisition cost for the 265 Bcfe of total reserves will be $1.94/Mcfe.

“We have locked in highly accretive returns from today’s acquisition by hedging 100% of the anticipated production for June 2004 through June 2005 at a price well above the assumed prices we used to evaluate the acquired properties,” said Chesapeake CEO Aubrey K. McClendon. “In addition, by financing this acquisition using cash on hand and low-cost debt, this transaction will be strongly accretive to our shareholders.

“In this time of strong natural gas prices, high gas price volatility and low interest rates, we believe Chesapeake can generate unusually attractive returns for its shareholders by acquiring under-exploited, long-lived, onshore natural gas properties and hedging the acquired production volumes during times of gas price strength,” he said.

Chesapeake used a similar strategy in March when it purchased 107 Bcfe of reserves in the Midcontinent, Permian and Texas Gulf Coast regions in four acquisitions totaling $100 million, or about $1.39/Mcfe. The purchases added about 15 MMcfe/d of daily production, all of which was hedged at $33.11/bbl of oil and $5.78/Mcf of gas through December 2005. Earlier in the winter, it completed three major property acquisitions totaling about $510 million and bringing its gas reserves to more than 3.4 Tcf and its production to an expected 875 MMcf/d in the first quarter, making it one of the top 15 largest gas producers in North America in terms of daily production (see NGI, Feb. 9).

McClendon noted that the Greystone purchase is part of the company’s strategy of growing in several new areas outside its traditional core of operations in the Midcontinent region. It has expanded into the Permian Basin, South Texas, Texas Gulf Coast and now the “Ark-La-Tex” region of northern Louisiana.

The Greystone purchase brings Chesapeake’s proved oil and natural gas reserves to 3.8 Tcfe and its projected June 2004 production to 950 MMcfe/d. Chesapeake said it expects to increase production from the Greystone properties by 50% to 65-70 MMcfe/d through a two-four rig drilling program during the next 12-18 months.

The company intends to finance the acquisition using a combination of proceeds from a new private issue of senior notes, borrowings from the company’s newly expanded $500 million bank credit facility and cash on hand. Chesapeake also is increasing its 2004 production forecast by 11 Bcfe (3.3%) to 341-347 Bcfe from 330-336 Bcfe.

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