Chesapeake Energy Corp. has monetized a portion of its proved reserves and production from certain company-operated wells in Kentucky and West Virginia, the company said last Wednesday.

An analysis by SunTrust Robinson Humphrey/the Gerdes Group shows "the company will receive roughly a $7.50 natural gas price for the volumes sold."

Chesapeake, the nation's second largest independent gas producer, sold a volumetric production payment (VPP) to affiliates of UBS AG and DB Energy Trading LLC (a subsidiary of Deutsche Bank AG) for $1.1 billion. The VPP entitles the purchaser to receive scheduled quantities of natural gas from Chesapeake's interests in more than 4,000 producing wells, free of all production costs and production taxes over a 15-year period.

UBS AG acquired ABN AMRO's futures and options business in 2006 (see NGI, May 29, 2006). Deutsche Bank called natural gas a "vital business" when it was expanding its presence in the U.S. gas market back in 2004 (see NGI, March 1, 2004).

The transaction, which closed on Dec. 31, includes approximately 210 Bcfe of proved reserves and 55 MMcfe/d of current net production, or approximately 2% of the company's current proved reserves and net production. Chesapeake has retained drilling rights on the properties below currently producing intervals and outside of existing producing wellbores. The company's operating and financial results will reflect reduced production and proved reserve volumes following the closing of the VPP transaction. Jefferies Randall & Dewey acted as financial advisor to Chesapeake.

"We are pleased to successfully implement another component of our 2007-2009 enhanced financial plan," said Chesapeake CEO Aubrey K. McClendon. "The production from these assets was monetized at a discount rate of 6.3% and the proceeds will be redeployed into our low-risk drilling program at anticipated rates of return in excess of 30%. Our first VPP transaction generated a high level of interest from financial investors and we look forward to further success in monetizing similar packages of mature properties in 2008 and 2009 for further proceeds of at least $2 billion."

Chesapeake outlined the monetization transaction late last year and described its plans going forward (see NGI, Nov. 12, 2007). Chesapeake said it plans to pursue four more monetizations of similarly mature properties in 2008 and 2009.

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