Total to pay $800M cash at closing to enter US shale gas business
Chesapeake Energy Corp. has agreed to 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 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 is expected by the end of January 2010.
Madison Williams sees the agreement as another successful dip into the joint venture market for Chesapeake as a means of monetizing its deep inventory of acreage. According to the firm, to date, the company has realized $10.8 billion of proceeds on assets with a book basis of $2.7 billion. While the time value of money erodes a portion of this $8.1 billion margin, the gap is large, and so is the value creation. The firm estimates the joint venture should result in $0.26 finding costs to Chesapeake and generate nearly $800 million of value in excess of the $1.45 billion carry, in addition to the $800 million received initially.
The assets subject to the Chesapeake-Total joint venture include roughly 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).
Chesapeake believes that its leasehold position will support the drilling of nearly 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 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, CEO of Total, stated, "Total is pleased to be making a strategically important move by entering into the US shale gas business with Chesapeake, the world's leading shale gas operator.”
Aubrey K. McClendon, Chesapeake's CEO, commented, "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.
Chesapeake will continue to pursue other joint ventures, potentially including large acreage positions in the Eagle Ford Shale and in several Mid-Continent unconventional plays. According to McClendon, the company has agreed to discuss with Total an Eagle Ford joint venture as well as joint ventures covering several Canadian natural gas shale plays, continued McClendon.