Oklahoma City-based Chesapeake Energy Corp.’s natural gas and oil production grew at a record pace in the second quarter, 29% over a year ago and 10% sequentially, the company reported Monday. The growth is expected to be even stronger in the coming months after Chesapeake announced it would add 310 Bcfe of estimated proved reserves, 453 Bcfe of estimated probable and possible reserves and 60 MMcfe/d of production through three new acquisitions in the MidContinent and South Texas. For the second quarter, Chesapeake generated net income of $85.8 million (31 cents/per diluted common share), compared with $76.3 million (31 cents) in 2Q2003. Analysts had forecast Chesapeake would earn 29 cents/share.
“Today’s announcements of very strong operational and financial results for the 2004 second quarter and of three new value-creating acquisitions provide ongoing confirmation that Chesapeake continues to execute with precision on its business strategy,” said CEO Aubrey K. McClendon. “This strategy focuses on delivering growth through a balance of acquisitions and organic drilling, focusing on natural gas to take advantage of strong long-term supply/demand fundamentals and building dominant regional scale to achieve low operating costs and high returns on capital.”
The company’s operations are focused in the MidContinent, Permian Basin, South Texas, Texas Gulf Coast and the Arkansas-Louisiana-Texas regions.
Production for the quarter was 86.5 Bcfe, an increase of 19.2 Bcfe, or 29% over the 67.3 Bcfe produced in 2Q2003, and an increase of 7.6 Bcfe, or 10%, over the 78.9 Bcfe produced in 1Q2004. The 19.2 Bcfe increase consisted of 7.7 Bcfe generated from organic drillbit growth and 11.5 Bcfe generated from acquisitions.
Quarterly production was comprised of 76.5 Bcf — 88% on a natural gas equivalent basis — and 1.67 million bbl of oil and natural gas liquids (NGL), or 12% on a natural gas equivalent basis. Chesapeake’s average daily production rate for the quarter was 951 MMcfe/d, consisting of 841 MMcf/d of gas and 18,385 bbl of oil and NGL.
During the quarter, the company replaced its 86.5 Bcfe of production with an internally estimated 429 Bcfe of new proved reserves, for a reserve replacement rate of 496% at a drilling and acquisition cost of $1.52/Mcfe. Reserve replacement through the drillbit was 143 Bcfe, or 165%, and reserve replacement through acquisitions was 286 Bcfe, or 331%. At the end of the second quarter, Chesapeake’s estimated proved reserves were 3.8 Tcfe (4.1 Tcfe pro forma for the three acquisitions).
Chesapeake’s new assets were bought for an undisclosed amount from three private companies. The transactions involve the acquisition of Tulsa-based Bravo Natural Resources Inc., substantially all the assets of Houston-based Legend Natural Gas LP and the substantially all the assets of Oklahoma City-based Tilford Pinson Exploration LLC.
Bravo’s assets consist of 20,000 acres located in the Granite Wash-producing Stiles Ranch and Allison Britt fields of the Anadarko Basin in Wheeler and Hemphill counties, TX and Roger Mills County, OK. The transaction is expected to close on Aug. 2, and Bravo was advised in its sale by Petrie Parkman & Co.
Legend’s producing assets and 18,000 net acres of leasehold are located in the Roleta, Haynes, Comitas and En Seguido fields in the Zapata County portion of South Texas. The transaction is expected to close on Aug. 31, and Legend was advised in its sale by Goldman, Sachs & Co.
Tilford Pinson’s producing assets and 12,000 net acres of leasehold are located primarily in the Arkoma Basin fields of Northwest Scipio, Northwest Reams and South Pine Hollow in Pittsburg County, OK. Major zones of production in these fields range from 2,500 foot Hartshorne sands to 6,000-8,000 feet Cromwell and Caney Shale plays. The transaction closed earlier this month.
“Chesapeake believes it can increase the newly acquired properties’ production from the current rate of 60 MMcfe/d to at least 90 MMcfe/d by year-end 2005 and at least 120 MMcfe/d by year-end 2006,” it said in a statement. The company has identified approximately 210 proved undeveloped and 410 probable and possible locations on the 50,000 net leasehold acres being acquired.
After allocating approximately $190 million of the combined $590 million purchase price to unevaluated leasehold and mid-stream gas assets, Chesapeake’s acquisition cost of proved reserves are estimated at $1.29/Mcfe. Including the $190 million of unevaluated leasehold and mid-stream gas assets value and the $690 million of anticipated future drilling costs necessary to fully develop the proved, probable and possible reserves, the company estimates that its all-in cost to develop the 763 Bcfe of reserves acquired in the three transactions will be $1.68/Mcfe. The acquired proved reserves have a reserves-to-production index of 14.2 years, are 92% gas, 97% company-operated, 35% proved developed and have current lease operating expenses of 29 cents/Mcfe.
The company intends to finance the $590 million of new acquisitions using an approximate 50/50 combination of senior notes and common stock issuance.
With the acquisitions, Chesapeake increased its 2004 mid-point production forecast by 10.0 Bcfe (2.9%) to a range of 353-355 Bcfe (967 MMcfe/d at the mid- point) from a range of 341-347 (940 MMcfe/d). Approximately 8.8 Bcfe of the increase is attributable to anticipated production from the three new transactions while 1.2 Bcfe is attributable to better-than-expected recent drilling results, said the company. The company forecasts that its organic growth rate will be at least 10% in 2004.
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