Chesapeake Energy Corp.’s agreement to share costs and some of the future income from its emerging Haynesville Shale leasehold with Plains Exploration & Production Co. (PXP) is a “brilliant transaction,” one energy analyst said Wednesday. Investors appeared to agree, sending the Oklahoma City-based producer’s stock price at one point to an all-time high despite a down day for the overall market.

PXP, which up to now has been weighted mostly to oil, bought a 20% stake in Chesapeake’s 550,000 acres of Louisiana shale for $1.65 billion in cash and agreed to fund half of the drilling and completion costs for Chesapeake’s 80% stake until another $1.65 billion has been paid (see Daily GPI, July 2). The deal, which would give PXP around 110,000 net acres in the play, has an implied value of $26,500-30,000/acre.

“There has been substantial industry interest in our leasehold in the past few months and we chose PXP as our partner because of our long relationship with its management team, its successful record as an effective industry partner in major projects and strong historic presence in the Louisiana energy industry,” Chesapeake CEO Aubrey McClendon said during a conference call Wednesday to discuss the transaction. PXP CEO Jim Flores shared a microphone during the call.

In Wednesday morning trading, Chesapeake’s share price rose about 6.4% ($4.35/share) to $71.71, briefly touching a new all-time high of $74. Chesapeake’s share price in the past year has ranged from $31.30 to $68. The company’s share price ended Wednesday up about 3% ($2.04) at $69.40.

McClendon, who leads the cheering section for domestic natural gas prospects, claimed Wednesday that the Haynesville Shale may be three times more prolific in estimated gas resources than the Barnett Shale of Texas.

“Haynesville, more than any other gas field, will enable our country to realize that we are blessed with natural gas resources and the use of natural gas will reduce our dangerous dependence on foreign oil,” said McClendon.

“Haynesville holds an estimated ultimate recovery (EUR) of 250 Tcf, with over 700 Tcf in place,” McClendon told investors and energy analysts. “By comparison, the Barnett holds about 50 Tcf EUR.”

McClendon said his “confidence” in the Haynesville Shale potential comes from tests that Chesapeake has drilled in the play. “We know the formation is present over a large area, with about 3.5 million acres in the core area. The prediction comes from two years of study of the area, during which time we analyzed over 70 penetrations of the Haynesville.”

Chesapeake’s eight horizontal wells to date have tested at 5-15 MMcf/d, McClendon noted. “We can contrast that with the 3-6 million from the very best Barnett wells,” he said. “Haynesville wells will be in a class of their own. If the Barnett wells are called monsters, I’m not sure what to call the Haynesville wells. Maybe ‘triple X’ monsters. And they are likely to get better over time as they always do in shale plays.”

David Tameron, an energy analyst with Wachovia Capital Markets, called the transaction “brilliant” and “a prudent, home run deal.” It “serves as a reminder why Chesapeake’s management is often so highly regarded by the Street.” And Goldman Sachs analyst Brian Singer said he was re-reviewing his earnings estimates for Chesapeake following the news. “We view the transaction positively for Chesapeake shares despite the recent rally, due to valuation as well as management’s willingness to offset increased capital spending via more conventional asset sales,” Singer wrote.

“The acreage grab, which has propelled Haynesville names in the past few months, has been phenomenal,” wrote Friedman, Billings, Ramsey & Co. Inc. (FBR) analysts Rehan Rashid and Michael Jones. “The purchase price…far exceeds what Chesapeake paid Goodrich Petroleum Corp. only three weeks ago ($17,370/acre), when we include an approximate four-year capital commitment, which requires PXP to pay 40% of (50% of Chesapeake’s) cost to drill the roughly 200 or so wells per year.”

In mid-June Chesapeake agreed to jointly develop Goodrich’s acreage in the Bethany-Longstreet and Longwood fields of Caddo and DeSoto parishes, LA (see Daily GPI, June 17). Chesapeake agreed to pay Goodrich $178 million for the deep rights to 10,250 net acres of leasehold. The transaction gave Chesapeake a 20% working stake in 25,000 net acres in the Bethany-Longstreet field and a 50% working interest in 10,500 net acres in the Longwood field.

By FBR’s calculations, Devon Energy Corp. holds the most cards in the Haynesville Shale, with net acreage of 515,000 acres. Chesapeake is in second place, with an estimated 499,250 net acres, followed closely by EnCana Corp., which has around 414,500 acres. Petrohawk Energy Corp. is on their heels, with an estimated leasehold of around 275,000 net acres.

By FBR’s estimates, 16 producers have a combined leasehold of around 2.4 million acres in the Haynesville Shale. Adding together the Haynesville shale and the shale/tight gas sands of the Bossier play in East Texas, the 16 have a combined leasehold of around 2.429 million net acres.

Based on initial drilling results, Chesapeake expects its average Haynesville Shale wells to ramp up at more than 10 MMcfe/d and average a recovery rate of more than 6.5 Bcfe for a drilling and completion cost of around $6.5 million.

Not all energy analysts are ready to put the Haynesville Shale at the top of the shale heap.

“We remain skeptical that these per well reserve recoveries are achievable across a wide-ranging Haynesville Shale drilling program,” said analysts with SunTrust Robinson Humphrey/the Gerdes Group. “Our current best estimate of Haynesville Shale economics suggests a +4 Bcfe of reserve recovery for a drill/complete cost of $7 million, which implies the capital productivity associated with Haynesville Shale development is only modestly superior to Cotton Valley development [in East Texas]. Notably, assigning a $30,000/acre valuation adds an incremental $2.4 million in per well costs assuming 80-acre spacing, thus equating to an approximate $9 million all-in Haynesville Shale well cost.”

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