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Chesapeake Wants to Partner Up in Fayetteville, Marcellus

Don't expect last week's announcement by Chesapeake Energy Corp. to bring on Plains Exploration & Production Co. (PXP) as a minority partner to explore the Haynesville Shale to be the company's last joint venture. The Oklahoma City-based independent is pursing minority partners for projects in the Fayetteville and Marcellus shales -- and possibly others -- CEO Aubrey McClendon said Wednesday.

Plans to bring in partners marks a turning point for Chesapeake, which -- according to McClendon -- is on course to become the top natural gas producer in the United States. The CEO is banking on the partnerships to help Chesapeake monetize its vast holdings.

On Tuesday Chesapeake announced it was bringing on PXP as a minority partner to explore the Haynesville Shale in Louisiana (see related story). In mid-June Chesapeake also agreed to jointly develop Goodrich Petroleum Corp.'s acreage in the Bethany-Longstreet and Longwood fields of Caddo and DeSoto parishes, LA.

"If you snooze you lose," McClendon told energy analysts and investors during a conference call Wednesday to discuss the PXP transaction. "We are writing a new chapter in creating value for the company, and we may sell minority interests to confirm the costs."

With around 500,000 net acres in Arkansas' Fayetteville Shale, it "could be worth up to $15 billion," McClendon said. "If we were to sell 25%, say, we would have proven the Fayetteville is worth almost $25 a share. We own 1.2 million acres in the Marcellus. Here's a new disclosure...we have new Marcellus wells that combined have produced more than 9 MMcf/d of gas. We're not ready to release all of the details, but 4-plus million a day is reasonable to date. If the geoscientific works as well as in the Haynesville, we can prove Marcellus is worth up to $15 billion."

The only thing not on the table where partnerships are concerned is the Barnett Shale in Texas, McClendon said. "It's the nature of the assets...we are embedded in an urban area, and it's difficult to bring in a partner. But we still have 220,000 net acres undrilled. We'll have 135 wells there over the next 10 to 12 years...The undrilled Barnett leasehold is worth at least another $11 billion.

"In four big shale plays, we have identified about $55 billion of value, or roughly $100 per share," said McClendon. "And we'd still be a company with 1.8 Bcfe a day of production without it," he said of the estimated extra value perceived in the Barnett, Haynesville, Marcellus and Fayetteville plays.

McClendon was coy about how far along in the process Chesapeake is in bringing in minority partners. The transaction with PXP was quick, he said.

Asked if the PXP joint venture was a competitive process, McClendon said it "was competitive and negotiated. At the end of the day we wanted to do something quiet and we wanted to do something fast. We [PXP CEO Jim Flores] had a conversation over the phone and we talked about their interest in Louisiana. We got together on it pretty fast...We knew what we wanted for the acreage, knew what happened to leasehold values in the Barnett, and could see what happened in Fayetteville. We had the information on our side that we were not going to sell it for a penny less."

For Flores, it was a matter of trust and an old friendship between the two men, said McClendon.

"He's coming in cold to the deal," McClendon said of Flores' agreement to partner up. "We only had data from three wells, and it took a little bit of warm-up time, which is why it's structured with half up front, half down the road" for financing. "We had a real nice explanation for how the [financial] structure motivates us, and it improves their rate of return as well."

PXP essentially will pay Chesapeake's costs to research the Haynesville Shale and help it continue to develop its leasehold.

"Plains gets significant exposure to prime acreage in arguably the hottest play in North America,," wrote RBC Capital Markets analyst Scott Hanold. "While the price seems high relative to recent deals, it is similar to core area Barnett acquisitions. Considering that the initial economics of the Haynesville Shale appear at least as good as the Barnett core, we think the price is reasonable."

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