Chesapeake Energy Corp. is picking up 39,000 net acres of Barnett Shale leasehold in Johnson and Tarrant counties, Texas, 30 MMcfe/d of current production and $55 million worth of midstream assets in an $845 million cash deal with Four Sevens Oil Co. Ltd. and its partner Sinclair Oil Corp. Chesapeake also is spending $87 million to buy 28,000 net acres of leasehold in the same area from other sellers.
In the Four Sevens/Sinclair deal the company said it is getting 160 Bcfe of proved reserves for $275 million for a cost of $1.72/Mcfe. Probable and possible reserves total 710 Bcfe at a cost of $515 million. Chesapeake’s all-in cost to develop the 870 Bcfe of 3P reserves is $2.32/Mcfe, including $1.2 billion of anticipated future development costs, it said. Proved reserves are 100% natural gas and 100% company operated.
Through an aggressive hedging program, Chesapeake has hedged 100% of the expected production in 2007 and 2008 at an average Nymex swap price of $10.50/MMBtu. “Price decks used to value the assets were much lower than the hedged prices and the forward curve further out,” Chesapeake said during an analyst presentation Monday. Subtracting basis differential, operating expenses, severance taxes and the cost of reserves yields unit cash flow of $6.23/Mcfe, according to Chesapeake. Basis differentials, currently pegged at 10%, are expected to improve with expansion of pipeline takeaway capacity, the company said.
During a call with analysts Monday, Chesapeake CEO Aubrey McClendon said the Barnett Shale currently offers the best margins in the business. The company maintains there is “virtually no drilling risk” in the area where it’s operating. Costs in the Barnett also are far more reasonable than those in the Fayetteville Shale, another hot play, where costs are substantially higher, McClendon said.
Oklahoma City-based Chesapeake is the second largest U.S. independent gas producer behind Devon Energy, which is the largest producer in the Barnett Shale. Chesapeake is No. 3 in the Barnett. Chesapeake said it expects to grow production on the acquired leasehold from 30 MMcfe/d to 45-50 MMcfe/d by year-end and to 80-100 MMcfe/d by year-end 2007.
Chesapeake’s current pro forma average daily net production in the Barnett is about 140 MMcfe. This is expected to reach 200 MMcfe net and 250 MMcfe net by year-end 2006 and 2007, respectively.
From Four Sevens/Sinclair, Chesapeake is getting 26,000 net acres in the Tier 1 portion of the Barnett Shale. Chesapeake describes this as a high quality reservoir area in the horizontal drilling fairway with high gas-in-place levels and optimal thermal maturity and shale thickness. Here, just 19 wells are producing 30 MMcfe/d. Chesapeake said its large contiguous acreage position will allow for optimal placement of horizontal wells and associated gathering systems.
The additional 28,000 net acres being acquired from other sellers are also mainly in the Tier 1 sweet spot. There are no reserves booked yet, but the company plans to drill 400 net horizontal wells to develop 650 Bcfe of unproved reserves at an all-in acquisition cost of less than $1.80/Mcfe. Chesapeake said a 3-D seismic survey is under way and the first drilling is expected to begin later this summer.
Chesapeake plans to finance the deal with a balance of senior notes and preferred equity in the near future. The transactions are expected to close by July 1.
The Barnett Shale continues to enjoy a reputation as one of the hottest natural gas plays going (see Daily GPI, Jan 17). Based on 2004 statistics, the Texas Railroad Commission reported the Barnett Shale gas field is the state’s largest producer (see Daily GPI, Feb. 24, 2005). Last month, Oklahoma City-based Devon announced a deal to buy the properties of Chief Holdings LLC (Chief Oil & Gas) in a $2.2 billion deal that expands the company’s Barnett Shale position to 720,000 net acres (see Daily GPI, May 3). Last week, Fort Worth-based XTO Energy Inc. said it would buy privately held Barnett producer Peak Energy Resources Inc. for $105 million of its stock (see Daily GPI, June 2). The deal grows XTO’s reserves and leasehold acreage in the Tier 1 and Tier 2 regions of the Barnett, mainly in Hood, Parker and eastern Erath counties, Texas.
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