November 4, 2011 - Chesapeake Energy (CHK) announced major
Utica Shale news last night in the form of a joint venture (JV). Chesapeake Energy (CHK) Announces Utica Shale Joint Venture and Utica Shale Financial Investment with Potential Combined Proceeds Net to Chesapeake of Approximately $3.4 Billion. This is the largest deal to date in the Utica Shale and is a sign of things to come!
JV Transaction Values 570,000 Net Acres of Chesapeake Utica Shale Leasehold at $8.55 Billion, or $15,000 Per Net AcreFinancial Transaction Provides up to $1.25 Billion to Accelerate Drilling Across All Phases of Chesapeake’s Utica Acreage, Including Dry Gas and Oil AreasChesapeake Energy Corporation (NYSE:CHK) today announced two transactions to monetize a portion of its 1.5 million net acres of leasehold in the
Utica Shale play primarily in eastern Ohio. Fully implemented, the transactions would result in consideration to Chesapeake of approximately $3.4 billion.
Chesapeake has entered into a letter of intent (“LOI”) with an undisclosed international major energy company for an industry joint venture (“JV”) through which the JV partner will acquire an undivided 25% interest in approximately 650,000 net acres of leasehold in the wet natural gas area of the Utica Shale play. Of this acreage, approximately 570,000 net acres are owned by Chesapeake, and approximately 80,000 net acres are owned by Houston-based EnerVest, Ltd. and its affiliates (“EnerVest”). The JV area covers all or a portion of 10 counties in eastern Ohio (the “JV AMI”). The consideration for the transaction will be $15,000 per net acre, or approximately $2.14 billion to Chesapeake and approximately $300 million to EnerVest. Approximately $640 million of the consideration to Chesapeake will be paid in cash at closing, and approximately $1.5 billion will be paid in the form of a drilling and completion cost carry, which Chesapeake anticipates fully receiving by year-end 2014.
Chesapeake will serve as the operator of the JV and will conduct all leasing, drilling, completion, operations and marketing activities for the project. The LOI provides that the JV partner will have the option to acquire a 25% share of all additional acreage acquired by Chesapeake in the JV AMI and the option to participate with Chesapeake for a 25% interest in midstream infrastructure related to production generated from the assets. The LOI provides for the execution of definitive transaction documents and closing by mid-December 2011.
Additionally, as a first step in a financial transaction led by EIG Global Energy Partners (“EIG”), Chesapeake has completed the sale to EIG of $500 million of perpetual preferred shares of a newly formed entity, CHK Utica, L.L.C. Chesapeake expects to sell up to $750 million of additional CHK Utica preferred shares to other investors, including limited partners of EIG, by November 30, 2011. CHK Utica is a wholly owned, unrestricted subsidiary of Chesapeake that owns approximately 700,000 net leasehold acres within an area of mutual interest in the Utica Shale play in 13 counties primarily in eastern Ohio (the “CHKU AMI”) that encompasses the JV AMI. Chesapeake has retained all the common interests in CHK Utica.
The CHK Utica preferred shares are entitled to receive an initial annual distribution of 7%, payable quarterly. Chesapeake retains an option exercisable prior to October 31, 2018 to repurchase the preferred shares for cash in whole or in part at any time at a valuation expected to equal the greater of a 10% internal rate of return or a return on investment of 1.4x. Assuming a total of $1.25 billion of CHK Utica preferred shares are purchased, investors in CHK Utica preferred shares will also receive a 3% overriding royalty interest in the first 1,500 net wells drilled on CHK Utica’s leasehold, which is the equivalent of an approximate 0.45% overriding royalty interest across Chesapeake’s projected 10,000 net well inventory. Chesapeake’s average net revenue interest on its Utica Shale leasehold is approximately 83%, which compares favorably to net revenue interests in the Haynesville, Barnett and Eagle Ford shale plays of approximately 75%.
As part of the financial transaction, Chesapeake has committed to drill a minimum of 50 net wells per year through 2016 in the CHKU AMI, up to a minimum cumulative total of 250 net wells, for the benefit of CHK Utica. Chesapeake believes it will have considerable operating and financial flexibility in fulfilling the drilling commitment because the company’s planned Utica Shale drilling program for the years ahead involves a significantly higher rig count than the approximate 10-rig drilling program required by the terms of the CHK Utica preferred shares investment.
