Oklahoma City-based Chesapeake Energy Corp. said late Thursday that it is acquiring $419 million of natural gas assets in the Barnett Shale, East Texas and Permian Basin from four private companies. The transactions together will give Chesapeake another 33 MMcf/d of current production, with 113 Bcfe of proved reserves and 181 Bcfe of probable and possible (3P) reserves.
The news came the same day that the independent reported a 99% increase in second quarter net income to $163.8 million ($1.71/share), from $97.2 million ($1.12/share) a year earlier. Chesapeake also reported that output rose 31% to 1,244 MMcf/d, 89% of which is natural gas (see Daily GPI, Aug. 5).
With the latest transactions, Chesapeake increased its 2005 production estimates by 2.4%, or 30 MMcfe/d, to estimated total production of 460 Bcfe for the year, or a daily average of 1,260 MMcfe. Production estimates for 2006 were increased by 2.0%, or 28 MMcfe/d, to estimated total production of 516 Bcfe for the year, or a daily average of 1,414 MMcfe/d. This marks the 21st time that Chesapeake has increased its production estimates in the past 16 quarters.
In the Barnett Shale transactions, Chesapeake said it would allocate $15 million of the purchase prices to gas gathering and compression assets and after including $368 million of future development costs, its estimated all-in acquisition cost for the 294 Bcfe of 3P reserves will be $2.60/Mcfe.
The largest of the four acquisitions is Chesapeake's recently closed purchase of Hallwood Energy III LP's 56% working interest in the 30,000 gross acre Chesapeake/Hallwood South Block AMI in Johnson County, TX in the Barnett Shale. Chesapeake had previously acquired a 44% working interest in the AMI area through its acquisition of Oklahoma City-based Canaan Energy Corp. in June 2002.
In the South Block transaction, Chesapeake anticipates acquiring an internally estimated 174 Bcfe of 3P reserves and current net production of 14 MMcfe/d. The company has identified 160 horizontal drilling locations on the 30,000 gross acre South Block that it believes can be drilled at an average cost of approximately $2.5 million per well to develop average estimated ultimate reserves (EUR) of approximately 2.0 Bcfe per well.
Chesapeake currently has two rigs drilling on this South Block acreage. Including production from both the North and South Block acreage, Chesapeake's current Barnett Shale average daily production is approximately 50 MMcfe and should average at least 80 MMcfe by December 2005 and 120 MMcfe/d by December 2006.
The South Block proved reserves have a reserves-to-production index of 7.9 years, are 100% gas, have current lease operating expenses of $0.20/Mcfe, have severance taxes of less than 1% of the wellhead revenue value and are 100% Chesapeake-operated.
Chesapeake has hedged 100% of its newly acquired Hallwood production volumes at an average New York Mercantile Exchange gas price of $8.53/MMBtu through March 31, 2006.
In addition to the Hallwood South Block acquisition, Chesapeake has also recently acquired or agreed to acquire an additional $160 million of natural gas properties in the East Texas and Permian Basin regions in three transactions with three private companies. In these acquisitions, Chesapeake is acquiring 19 MMcfe/d of net production and 120 Bcfe of 3P reserves. The proved reserves acquired in the three miscellaneous transactions have a reserves-to-production index of 10.2 years, are 99% gas, have current lease operating expenses of approximately $0.20/Mcfe and will be 98% Chesapeake-operated.
The company has initially financed its recent acquisition activity with funds drawn from its bank credit facility, but intends to permanently fund these acquisitions with a combination of equity and/or long-term senior unsecured notes issued in the near future.
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