Chesapeake Energy Corp. is contemplating how to structure a possible partnership for its South Texas conventional natural gas leasehold, the company’s CFO said Friday. Instead of selling an outright stake in the assets, as has been Chesapeake’s recent modus operandi, it instead may use a volumetric production payment (VPP) transaction, which would give the buyer some oil and natural gas output in exchange for cash.

The Oklahoma City-based producer, which has been working to shore up its bottom line, could fetch $650-800 million by offering a VPP for the South Texas leasehold, CFO Mark Rowland said Friday at the Bank of America Energy Conference. To date, selling the assets outright has proved unsuccessful, he said.

“We received some bids that we thought were no more competitive than VPP transaction values,” Rowland told investors. “We are actually both negotiating with the people that have put the bids in and have taken the package to the banks that have said they were interested in a VPP.”

VPP transactions allow a buyer to pay the seller a certain amount in exchange for a share of the produced oil or natural gas. VPPs tend to be more advantageous to the buyer when commodity prices are high, but they also are considered less risky than buying a leasehold.

Chesapeake since mid-year has pursued stakeholders to buy into some of its gas plays across the United States. Since July the company has sold stakes in its holdings in the Marcellus, Fayetteville, Woodford and Haynesville shales (see Daily GPI, Nov. 12; Sept. 3; July 18; July 2). Although it may have wanted to sell all of the leasehold or an interest in the South Texas assets, Chesapeake is not averse to VPPs — it has some in place on portions of its Midcontinent and Appalachian Basin properties.

The South Texas/Gulf Coast assets now on the market produced 16,818 MMcfe/d, or about 8% of the company’s total production in the third quarter, which was 213,517 MMcfe/d, according to the company’s quarterly report. In the same period of 2007, the South Texas assets produced 19,582 MMcfe/d, which at the time as about 10% of the company’s total output in the quarter, or 186,405 MMcfe/d.

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