In a transaction worth about $118 million, two Oklahoma City-based independents, Chesapeake Energy Corp. and Canaan Energy Corp. plan to merge. Chesapeake, which already owns about $4 million of Canaan stock, said it would acquire the 4.5 million shares it does not own for $18 a share in cash and assume $33 million in debt. Canaan’s proved reserves, estimated at 100 Bcfe, are 91% natural gas, 74% proved developed, and are located almost exclusively in Chesapeake’s core Mid-Continent operating area.

The Canaan transaction will increase Chesapeake’s proved reserves by 5% to 2.0 Tcfe and will increase Chesapeake’s previously projected production for 2002 by 4 Bcfe to 172 Bcfe (assuming the transaction closes in the third quarter). Chesapeake’s previously projected production for 2003 of 175 Bcfe will increase by 8 Bcfe to 183 Bcfe.

Chesapeake values Canaan’s proved reserves at $1.14/Mcfe after allocation of $4 million of the purchase price to Canaan’s undeveloped leasehold inventory and other assets. Based on current production rates of 22,000 Mcfe/d (8 Bcfe/year), Canaan’s reserves-to-production ratio is 12.5. Chesapeake’s estimated proved reserves at the end of 2001 were 1.8 Tcfe, and at the end of the first quarter, it had increased its reserves to 1.9 Tcfe.

“This acquisition fits perfectly with Chesapeake’s business strategy of creating value by acquiring and developing low-cost, long-lived natural gas assets in the Mid-Continent region of the U.S. Canaan has built a strong foundation of gas production and an attractive inventory of drilling projects, which Chesapeake intends to develop more aggressively than Canaan could have”, said Chesapeake CEO Aubrey K. McClendon.

Although definitive purchase documents have been signed and both boards have unanimously approved the transaction, the agreement is subject to normal regulatory approvals and a Canaan shareholder vote. Completion of the transaction is expected in the third quarter of 2002. Canaan presently has 4.4 million common shares outstanding, plus employee and director options of 0.5 million shares. Of the outstanding shares, Chesapeake owns 0.3 million shares. Canaan’s management and directors have agreed to vote their 1.2 million common shares in favor of the agreement.

Chesapeake will record the transaction using purchase accounting. In addition, under certain circumstances, Canaan has agreed to provide Chesapeake with a $5.0 million break-up fee in the event the transaction is not completed. CIBC World Markets advised Canaan in the transaction.

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