Chief Oil & Gas LLC, which was the No. 2 natural gas producer in the Barnett Shale until it sold its leasehold three years ago, is taking on Canada's Enerplus Resources Fund to help develop half a million acres in the Marcellus Shale.
Enerplus said Wednesday it agreed to pay $406 million ($3,500/acre) to acquire a 30% stake in 552,000 acres (gross) held by Chief affiliates and a limited partnership managed by Tug Hill Inc. The transaction, set to close in early September, would give Enerplus an average 21.5% nonoperated working interest in about 116,000 net acres.
"This transaction is a significant step in high grading our asset base to provide greater growth potential and further improve our operating performance," said Enerplus CEO Gordon Kerr. "Enerplus has gained an entry point into one of the premier shale gas resource plays in North America, consistent with our strategic direction, with an experienced partner who has a proven track record in shale gas development. With the play in the early stages of development, we believe there is tremendous opportunity for future production and reserves.
Privately held Chief would continue to operate the properties, and as part of the transaction, midstream services would be provided by affiliate Chief Gathering LLC.
Most of the leasehold interest held by Chief and Tug Hill is in the northeast and southwest portions of Pennsylvania, with some spillover into West Virginia and Maryland. In the past two years Chief has drilled 31 Marcellus Shale wells, 10 vertical and 21 horizontal. Total gross production from the first wells placed into production is 8.7 MMcfe/d. Three drilling rigs now are contracted, but under the enhanced development plan, seven more rigs would be added to the play by 2012.
"The alliance with Enerplus will help us expand our operations throughout the Marcellus Shale region, bringing jobs to those areas and enhancing the economic development potential," said Chief CEO Trevor Rees-Jones. "Chief is committed to being a major part of the growth of the Marcellus. Our partnership with Enerplus will help us reach those goals."
Rees-Jones is no stranger to shale plays. In 2006 Chief's gas production was the second only to Devon Energy Corp. in the Barnett Shale. That year Rees-Jones dealt his 720,000 net leasehold to Devon for $2.2 billion (see Daily GPI, June 30, 2006; May 3, 2006). Devon's bid was made jointly with Crosstex Energy Services, which acquired Chief's gathering assets in the Barnett.
Enerplus agreed to pay $162.4 million in cash at closing. The company also plans to pay $243.6 million as a carry for half of the partners' future drilling and completion costs in the shale play, which would be invested over the next four years. Area of mutual interest agreements also are to give Enerplus the opportunity to partner on any related acquisitions or swaps in the Marcellus play.
Through the rest of this year, Enerplus plans to spend about $27 million to drill 15 wells gross. Over the next five years, Enerplus said it would participate in 750 wells gross, based on the current development plans.
To partially fund the acquisition, Enerplus said it would issue 9.25 million trust units at C$21.65/unit for estimated gross proceeds of C$200 million. Enerplus expects to fund future capital requirements for its Marcellus Shale stake through cash flow and/or debt.
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