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Chesapeake Expands TX Gas Holdings with $277M Hallwood Purchase

Chesapeake Expands TX Gas Holdings with $277M Hallwood Purchase

Chesapeake Energy Corp. said Tuesday it is buying an 18,000-acre property in Johnson City, TX for $277 million in cash from the privately held Hallwood Energy Corp. The property holds an estimated 135 Bcfe of proved reserves, 145 Bcfe of probable and possible reserves, and net production of 25 MMcfe/d.

With the acquisition, Chesapeake's proved oil and natural gas reserves will increase to an internally estimated 4.6 Tcfe as of Sept. 30, 2004. Chesapeake, headquartered in Oklahoma City, also agreed to purchase Hallwood's gas gathering, compression and water disposal assets for $15 million.

CEO Aubrey K. McClendon said the acquisition was important for several reasons. "First, we are building our Barnett Shale ownership and creating economies of scale by leveraging off our acquisition of Canaan Energy Corp. in June 2002. In that $120 million transaction we inherited an initial Barnett Shale leasehold position in Johnson County, TX, to which we initially gave no value. Today it appears that Chesapeake's South Block Barnett Shale position may be worth more than what we paid for the entire Canaan transaction.

"Second, Chesapeake is well positioned to continue Hallwood's successful production ramp-up currently under way, having worked closely with Hallwood for two years in the South Block and because of our extensive experience with horizontal drilling (more than 285 horizontal wells drilled in Texas since 1990) and 3-D seismic (more than 9.0 million acres owned).

"Finally, we believe we have been conservative in our reserve estimates for the acquired property..." and "over time, we are hopeful that our reserve estimates can increase and that our well spacing can decrease, leading to significantly higher recoverable proved reserves than currently projected."

The North Block property is located north of Hallwood's 30,000-acre South Block property, which Chesapeake acquired a 44% working interest in its June 2002 acquisition of Canaan. Chesapeake has identified approximately 70 proved undeveloped and 90 probable and possible horizontal drilling locations on the North Block that it believes can be drilled at an average cost of approximately $2.2 million/well to develop estimated ultimate reserves of 2.5 Bcfe/well.

Chesapeake is forecasting that the acquired property's natural gas production may expand from its current 25 MMcfe/d "to at least 55 MMcfe/d by December 2005 and to at least 85 MMcfe/d by December 2006." If the increases are achieved, Chesapeake said its average daily production in 2005 will increase by 40 MMcfe/d, and by 70 MMcfe/d by 2006. The company has hedged the current 25 MMcfe/d of acquired production at Nymex gas prices of $7.15/MMBtu for 2005 and $6.63/MMBtu for 2006.

The acquisition is expected to close by mid-December, and will be financed with proceeds from a new $600 million private issue of senior notes. A conference call was scheduled for 9 a.m. Wednesday to discuss the acquisition. To access the call, visit the web site at

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