Chesapeake Energy Corporation Announces $2.25 Billion Barnett Shale Joint Venture with Total E&P USA, Inc.admin
January 4, 2010 Filed Under: Mining Investment, Oil and Gas
Chesapeake Energy Corporation announced the execution of an agreement for a $2.25 billion joint venture with Total E&P USA, Inc., a wholly-owned subsidiary of Total S.A. (NYSE:TOT, FP:FP) (“Total”), whereby Total will acquire a 25% interest in Chesapeake’s upstream Barnett Shale assets. Total will pay $800 million in cash at closing and will pay an additional $1.45 billion by funding 60% of Chesapeake’s share of drilling and completion expenditures until the $1.45 billion obligation has been funded, which Chesapeake expects to occur by year-end 2012. Closing of the transaction, which is subject to regulatory approval, is anticipated by the end of January 2010.
The assets subject to the Chesapeake-Total joint venture include approximately 270,000 net acres of leasehold in the Core and Tier 1 areas of the Barnett, approximately 700 million cubic feet of natural gas equivalent per day of current net production and approximately 3.0 trillion cubic feet of natural gas equivalent (tcfe) of proved reserves (0.75 tcfe net to Total). In addition, Chesapeake believes that its leasehold position will support the drilling of approximately 3,100 additional net locations (775 net to Total) with approximately 6.3 tcfe of unrisked unproved reserves (1.6 tcfe net to Total). Approximately 60% of Chesapeake’s Core and Tier 1 leasehold is held by production (HBP) and therefore considered developed.
In the framework of the joint venture, Chesapeake plans to continue acquiring leasehold in the Barnett and Total will acquire its 25% share of the new acreage on promoted terms until December 31, 2015. After such date, Total’s right to acquire its 25% proportionate share of Chesapeake’s leasehold will be on an unpromoted basis and Total will also begin paying 25% of Chesapeake’s support costs related to the joint venture’s corporate development activities.
Christophe de Margerie, Chief Executive Officer of Total, stated, “Total is pleased to be making a strategically important move by entering into the U.S. shale gas business with Chesapeake, the world’s leading shale gas operator. This joint venture will provide us with a solid position in an attractive long-term resource base under competitive terms. It will allow Total to develop its expertise in unconventional hydrocarbons in order to expand its unconventional business worldwide. Additionally, this transaction adds yet another key support for Total to build the gas value chain position the Group has established in the U.S., the world’s largest and most liquid natural gas market, with our existing capacity rights in the Sabine Pass LNG terminal and our gas trading and marketing organization. Total is conscious of the environmental aspect linked to producing shale gas and has confidence in Chesapeake’s capacity to contain the impact of the Barnett Shale gas’ operations on the environment and respect local and federal regulations and guidelines.”
Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented, “We are very pleased to announce our fourth joint venture transaction in the Big 4 shales and we are honored to partner with Total to further develop the Barnett Shale. Total is one of the largest and most well respected industrial enterprises in the world. It was established in 1924, is the fifth largest integrated natural gas and oil company, has approximately 97,000 employees and has a market valuation exceeding $150 billion. Total approached Chesapeake about a Barnett joint venture approximately seven months ago and during this time the companies have worked diligently and thoughtfully to structure this mutually beneficial joint venture.
“This transaction will allow Chesapeake to reduce its financial leverage and future capital expenditures and further position us to deliver industry-leading finding and development costs and returns on capital for years to come. This brings our combined shale joint venture proceeds, including upfront cash payments and drilling carries, during the past 18 months to approximately $10.8 billion, which compares very favorably against a cost basis in the assets sold of approximately $2.7 billion. Chesapeake has maintained majority positions in these joint venture shale assets ranging from 67.5% to 80% that have an implied remaining value of approximately $33 billion based on the original valuations of the four joint ventures.
“We are proud to welcome Total into our family of joint venture partners, which also includes the world-class companies Plains Exploration & Production Company, BP America and Statoil. We believe these partnerships have proven to be mutually beneficial to both Chesapeake and its partners. We plan to continue to take advantage of our large asset base by pursuing other joint ventures, including potentially our large acreage positions in the Eagle Ford Shale and in several Mid-Continent unconventional plays that we believe would be attractive to potential partners. We have agreed to discuss with Total an Eagle Ford joint venture as well as joint ventures covering several Canadian natural gas shale plays in which Total has shown an interest.”
Chesapeake’s exclusive advisor on the transaction was Jefferies & Company, Inc.