Chesapeake Energy Corp. of Oklahoma City, OK, said in late December it had entered into an agreement to acquire privately held BRG Petroleum Corp. and related partnerships for $325 million in cash.
The deal calls for Chesapeake to acquire an estimated 223 Bcfe, 227 Bcfe of probable and possible reserves and net production of approximately 30 MMcfe/d from 477 existing wells. The acquisition of Tulsa-based BRG Petroleum is expected to close on Feb. 1 and is subject to customary closing conditions. Chesapeake said it intends to finance the acquisition from cash on hand and through its bank credit facility, which it plans to expand to $1 billion.
After allocating $71 million of the $325 million purchase price to BRG Petroleum’s estimated 120,000 net acres of undeveloped leasehold (and related probable and possible reserves) and $5 million to mid-stream assets, Chesapeake’s acquisition cost for the 223 Bcfe of estimated proved reserves will be $1.12/Mcfe, the company said.
Including $492 million of anticipated future costs to fully develop the proved, probable and possible (3P) reserves, the company estimates that its all-in acquisition cost for acquiring and developing the 500 Bcfe of 3P reserves should be $1.62/Mcfe based on Chesapeake’s projected development plan and anticipated future drilling costs.
BRG Petroleum’s proved reserves have a reserves-to-production index of 20.3 years (9.7 years excluding proved undeveloped reserves), are 93% gas, are 48% proved developed, have current lease operating expenses of $0.53/Mcfe and will be 96% Chesapeake operated.
The BRG Petroleum properties are concentrated in the Midcontinent and Ark-La-Tex regions. In the two areas, Chesapeake said it has identified 213 proved undeveloped and 420 probable and possible locations on BRG’s leasehold. The drilling sites are concentrated in the Sahara gas resource play in Northwest Oklahoma and in the East Texas Cotton Valley resource play in Nacogdoches County, TX.
Through the use of two rigs in 2005 and four rigs in 2006, Chesapeake said it believes it can increase gas production on the acquired properties from 30 MMcfe/d at closing in February 2005 to 40 MMcfe/d in December 2005, and to 70 MMcfe/d in December 2006. Assuming these targets are achieved, Chesapeake estimates that its total average daily production in 2005 and 2006 will rise by 35 and 55 MMcfe/d, respectively.
The company noted that it has hedged 67% of BRG Petroleum’s current gas production at the Nymex gas prices of $7.42/MMBtu and $7.45/MMBtu for 2005 and 2006, respectively.
“BRG will add to our very strong presence in the Midcontinent, especially in the Sahara region of Northwest Oklahoma…To date, we have drilled more than 600 wells in this area and believe we can drill approximately 2,500 additional wells in the next five to 10 years, providing more than 1 Tcfe of potential gas resource upside to Chesapeake’s existing approximate 5 Tcfe of proven reserves,” said Chesapeake CEO Aubrey K. McClendon.
In addition, through BRG Chesapeake will build on the company’s Ark-La-Tex position that initially was established through its acquisition of Greystone Petroleum LLC in June of this year. In that transaction, Chesapeake acquired a significant interest in the Sligo Field in North Louisiana’s Bossier Parish, where the company currently has a net production of about 60 MMcfe/d.
To further enhance its Ark-La-Tex position, Chesapeake in its latest transaction will acquire 37,000 net leasehold acres in the Naconiche Creek area of Nacogdoches County, where more than 75 wells have been drilled by BRG. “We now intend to accelerate further development of the field by drilling over 600 additional wells that should develop an average estimated [ultimate recovery] of 0.9 Bcfe per well for a per well investment of $900,000,” said McClendon.
Last month, Chesapeake closed its $292 million acquisition of Barnett Shale properties from Dallas-based Hallwood Energy Corp. It picked up 135 Bcfe of proved reserves, 145 Bcfe of probable and possible reserves and net production of about 25 Mcfe/d from Hallwood’s 18,000-acre North Block assets in Johnson County, TX.
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