Chesapeake expands Marcellus position, divests from Powder River basin

Chesapeake Energy Corp., Oklahoma City, agreed to acquire Chief E&D Holdings LP and associated non-operated interests held by affiliates of Tug Hill Inc. and will use proceeds from a sale of Powder River basin assets to Continental Resources Inc. to help fund the deal.

The operator will pay $2 billion in cash and about 9.44 million common shares to add to its Marcellus position in northeast Pennsylvania, acquiring about 113,000 net acres (>90% held by production).

Assuming an Apr. 1 closing date, the asset is currently projected to produce about 835 MMcfd of net gas for 9 months in 2022 and generate about $500 million in 2022 projected adjusted EBITDAX (including acquired hedges) at current commodity strip prices, the operator said. The plan is to maintain acquired production of 800–900 MMcfd with 1–2 rigs over the next several years.

Also with the deal, premium undeveloped locations grow by about 25%, and pro forma Marcellus production capacity is increased by up to 200 MMcfd of gas when compared to stand-alone companies combined, through shared midstream assets, the company said.

Chesapeake expects annual synergies of $50-70 million.

Powder River basin divestiture

To help pay for the assets, Chesapeake signed an agreement to sell its Powder River basin assets in Wyoming to Continental Resources Inc. for about $450 million in cash. At closing, expected in this year’s first quarter subject to closing conditions, net proceeds from the sale will go toward the purchase price of the Chief acquisition.

The assets include about 172,000 net acres and 350 operated wells and 17 permits in southeastern Wyoming. Fourth-quarter 2021 Powder River basin volumes are expected to average about 19,000 boe/d, some 58% of which was crude oil and natural gas liquids.

For Continental, the deal—its second in the basin following its entry transaction with Samson Resources II LLC, Tulsa., Okla., in March 2021—scales the operator to about 500,000 net acres in the basin, with acreage about 15 miles south of its current position, said Cowen and Company analysts in a note Jan. 25 (OGJ Online, Mar. 15, 2021).  

“The move effectively creates a call option on further play delineation and oil resource in a robust commodity environment, and is done so inexpensively,” the analysts said.

Preliminary outlook

Upon closing of the transactions, Chesapeake plans to operate two rigs on the acquired properties during 2022, for a total of 9–11 gas-focused rigs and 2–3 oil-focused rigs. Its 2022 reinvestment rate is expected to be 47%. At current commodity strip prices, this preliminary capital program is anticipated to generate $3.4–3.6 billion in total adjusted EBITDAX, the operator said.