CHK Inks Marcellus Deal

  • The Money: $3.375 billion: $1.25 billion cash upfront; $2.125 billion in drilling costs over 2009-2012.
  • The Position: CHK gives up 32.5% of their Marcellus position (or 600,000 acres of their 1.8 million acre position). The company had been looking to farm out 25% of their leading position in the play but at the present time I think bigger will be viewed as better.
  • This is a 1/3 (just under) for 3/4s Carry. The future drilling costs are a 3/4 carry for Chesapeake which will significantly reduce CHK's need for capital in the play during the play's initial, most costly phase of development.
  • Closing by year end. CHK has been promising that some form of Marcellus deal gets done this year.
  • Valuation Implication: This values the entire Marcellus play at $10.4 B ($3.375 B/32.5% interest). CHK's Enterprise value (Mkt cap + debt) was $26.1 B as of yesterday's close. So for $16 billion you get the #2 producer in the Barnett and Fayetteville Shales, and the #1 player in the Haynesville Shale not to mention the rest CHK's holdings. When you consider they have not booked any reserves in the Marcellus yet the market is valuing them at substantial discount to on a $/ Mcfe basis.
  • STO Put Reserve Numbers On The Deal Providing A Little Outside Confirmation.

    • STO said they are acquiring future recoverable reserves of 2.5 to 3.0 billion barrels of oil equivalent. That's equal to 15 to 18 Tcfe to their interest.
    • For CHK's 62.5% interest that comes to 28 to 34 Tcfe. Put that up against CHK's 3Q booked reserves for the entire company of 12.1 Tcfe.
  • STO Even Provided Some Long Range Snap Shots on Production Growth. One of the benefits of dealing with resource (manufacturing) plays is their predictability.

    • STO made the comment they see production to their interest of "at least" 50,000 Boepd by 2012 and "at least" 200,000 Boepd by 2020.
    • Putting that into gas language and adjusting to the higher working interest percentage for CHK that comes to production net to CHK of just under 0.6 Bcfepd in 2012 and 2.3 Bcfepd by 2020.
    • Compare that to CHK's 3Q08 produciton of 2.3 Bcfepd.
  • CHK To Keep Growing Marcellus Acreage. CHK will keep adding and STO will have the right to participate in the new leases at the same 32.5% working interest.
  • Cause For Pause. There's always a catch and though this may be a harmless one analysts will probably be dubious (it's in their nature) of the statement that "CHK and STO have agreed to enter in an international strategic allicae to jointly explore unconventional natura gas opportunities worldwide". The CHK story is an onshore, U.S. only natural gas story and the last thing people want to see them do is go on safari looking for more gas.
  • In A Nutshell... I think its a good deal for the above reasons and because they needed to do it, because they didn't do it with BP (always good to diversify your deal basket), and because it provides another opportunity for them to yell, "look at the implied valuations man, we're not crazy, another company sees it, why don't you???!!!"
  • Likely Positive Implications for:  (XCO), (ATN), (PVA), and (RRC).

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