Chesapeake adds $2.25B Total JV to list of growing partnerships
Photo courtesy of Chesapeake Energy
Mikaila Adams, Associate Editor, OGFJ
Recently, Chesapeake Energy Corp. signed a $2.25 billion joint venture with Total E&P USA Inc., a wholly-owned subsidiary of Total SA, whereby Total will acquire a 25% interest in the shale gas operator's upstream Barnett Shale assets.
In a recent trend, supermajors and foreign companies alike are taking a closer look at US shale plays and joining forces with US independents. Companies like Chesapeake are using these partnerships to help pay for, and ramp up, activity in certain shale plays—formations deemed by some as the future of the business.
In 2008 Chesapeake forged a 75/25 joint venture with BP in the Fayetteville. Last year, the natural gas producer partnered with Statoil to access funds for its drilling and development activity in another hot shale play, the Marcellus.
Transaction details
This time, Chesapeake is looking to boost its Barnett activity with a joint venture agreement with French major Total. Total, the fifth largest integrated oil company in the world with a market cap of over $150 billion and production of about 2.4 million boe/d, has a large offshore US presence in the Gulf of Mexico, but hasn't held a significant presence in the US onshore since the 1980's and '90s. This transaction marks its return.
Chesapeake's exclusive advisor, Jefferies & Co. Inc., first introduced the two companies in May 2009. After a series of meetings, the two companies began JV discussions. The match was made. "Total focused on the Barnett because of its size, maturity and immediate production impact capabilities. From Chesapeake's perspective, it was the only shale of the Big 4 left in which we did not already have a JV partner," said Aubrey McClendon, chairman and CEO of Chesapeake.
As the transaction closed on January 26, Total provided Chesapeake with an upfront investment of $800 million. Going forward, the company will fund 60% of Chesapeake's drilling and completion costs until an additional $1.45 billion obligation—expected by year-end 2012—has been reached.
Management analysis
In a conference call with analysts after the transaction announcement, McClendon provided his thoughts on the benefits to Chesapeake.
While Total bought 25% of Chesapeake's Barnett upstream assets, which includes current production of roughly 175 million cubic feet of gas equivalent per day, Chesapeake reaffirmed its previous production forecast of 2.65 billion cubic feet of gas equivalent per day for 2010.
According to McClendon's calculations, the transaction values 100% of the company's Barnett assets at $9 billion. "Chesapeake's current enterprise value is about $27 billion, and so when you subtract the value of our non-oil and gas assets, our oil and gas enterprise value is closer to $23 billion. Therefore we sold about 6% of our current production for roughly 10% of our enterprise value."
Also of note, stated McClendon, was that reported production growth was not affected.
"The reason we can sell 175 million per day for $2.25 billion and not have to reduce our 2010 production forecast is a simple one," he said. "Our production levels continue to exceed what our budgets have been predicting and so we are able to deliver this very attractive joint venture to our shareholders yet not have to sacrifice any reported production growth to achieve it."
"Said another way, we will be collecting $800 million in upfront cash 30 days from now and reducing our CAPEX by another $1.45 billion over the next three years while selling 175 million per day, yet still not reducing our previous production forecast. In fact, we are actually increasing our 2011 projected production by 50 million per day, or an additional 2%."
The $1.45 billion in carries is tax deferred to Chesapeake; therefore, the transaction will not result in a gain for income tax purposes on the date of the transaction. "As a result," noted McClendon, "this deal really has roughly the same financial impact to Chesapeake as an all-cash deal of about $2.75 billion rather than the headline number of $2.25 billion."
The JV assets include roughly 270,000 net acres of leasehold in the Core and Tier 1 areas of the Barnett. Chesapeake believes that its leasehold position will support the drilling of approximately 3,100 additional net locations (775 net to Total) with roughly 6.3 tcfe of unrisked unproved reserves (1.6 tcfe net to Total).
The plans continue
Depending on rig availability in 2010, Chesapeake anticipates ramping up its rig count in the shale play from 20 to near 30.
The company also plans to continue acquiring leasehold in the play. The recent agreement assigns 25% of any new acreage to Total on promoted terms until December 31, 2015. After that date, Total's right to acquire its 25% proportionate share of Chesapeake's leasehold will be on an unpromoted basis and Total will begin paying 25% of Chesapeake's support costs related to the JV's corporate development activities.
When asked how much more acreage there is to be had in the Barnett, McClendon estimated over 100,000 acres inside of the company's buy areas. One big question mark, noted McClendon, is ExxonMobil's plan now that it has acquired XTO—Chesapeake's biggest urban competitor over the last few years. While the acquisition is a sure sign of interest in the shale plays, McClendon points out that Chesapeake bought Exxon out of the Barnett in the first half of 2008. "The urban part of Fort Worth, at least at one time in Exxon's history, was not something they were too excited about," he said.
During the past 18 months, Chesapeake has earned combined shale joint venture proceeds, including upfront cash payments and drilling carries, to nearly $10.8 billion. The cost basis in the assets sold is estimated at $2.7 billion. All the while, the company has maintained majority positions ranging from 67.5% to 80% in the ventures. McClendon puts the implied remaining value of the positions at nearly $33 billion based on the original valuations of the four joint ventures.
Going forward, the company will continue to pursue JVs. Currently the company is looking at large acreage positions in the Eagle Ford Shale and in several Mid-Continent unconventional plays and has agreed to discuss additional JVs with Total regarding the Eagle Ford and several Canadian natural gas shale plays.
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