By Oil & Gas Financial Journal staff
On Monday, the country's second-largest US natural gas producer Chesapeake Energy (NYSE:CHK) unveiled a three pronged plan to transform the US transportation fuels market and reduce OPEC Oil imports.
In an effort to replace the demand for gasoline and diesel fuels derived from OPEC fuels with domestic oil, natural gas, and natural gas liquids, the Oklahoma City-based company will create Chesapeake NG Ventures Corp. (CNG
V)—a $1 billion venture capital fund dedicated to identifying and investing in related companies and technologies.
Long a proponent of natural gas use, Chesapeake CEO Aubrey McClendon, commented on the initiative: "We believe the long-term solution to America's economic and energy challenges will come from American natural resources combined with American ingenuity and innovation. Our plan lays out a clear, affordable and achievable pathway for the rejuvenation of the American economy, the further greening of our environment and the reorientation of our foreign policy away from being captive to OPEC oil dependence.
So convinced of the economic attractiveness of the plan, stated McClendon, the company plans to invest 1%-2% of its forecasted annual drilling budget (roughly $80 million - $100 million) each year for the next ten years to fund the initiative.
The plan aims to:
• Increase existing domestic onshore oil and natural gas liquids (NGLs) production of approximately 8 million barrels a day by 3-4 million barrels a day through the acceleration of horizontal drilling and hydraulic fracturing,
• Invest in enough publicly accessible compressed natural gas (CNG) and liquefied natural gas (LNG) fueling stations to give manufacturers the confidence to increase production of CNG and LNG vehicles,and
• Deploy innovative and scalable GTL processes to convert natural gas into liquid transportation fuel that can be blended with existing supplies of gasoline and diesel or used as a stand-alone replacement product
McClendon said Chesapeake plans to “take full advantage of the associated cost savings and emissions reductions” by accelerating the conversion of all 4,500 of its light duty fleet vehicles to run on CNG and 400 of its heavy duty fleet vehicles to run on LNG, saving the company an estimated $15-$20 million per year in fuel costs. Along those lines, he said the company is also working to convert at least 100 of its drilling rigs and all of its planned hydraulic fracturing equipment to run on LNG. McClendon estimated converting the rigs and hydraulic fracturing equipment will cut the company's diesel fuel consumption by nearly 350,000 gallons a day and save the company roughly $230 million a year.
First two investments
Already on its way to accomplishing the goals set forth in its new natural gas initiative, Chesapeake has made initiated two investments.
The company will invest $150 million through three $50 million 7.5% tranches with a 22.5% conversion premium of newly issued convertible debt of Clean Energy Fuels Corp. with the first tranche already paid and the other two planned for June 2012 and June 2013. The investment is expected to accelerate the development of Clean Energy’s LNG fueling infrastructure for heavy duty trucks across US interstates.
Chesapeake has also agreed to invest $155 million in a 50% ownership stake on a fully diluted basis in Sundrop Fuels Inc., a privately held cellulosic biofuels company, to fund the construction of the largest nonfood biomass-based plant in the world, capable of producing 40 million gallons annually of ultra clean gasoline for use in automobiles, diesel engine vehicles and aircraft.
The first $35 million tranche of the Louisville, Colorado-based Sundrop Fuels investment has been funded with the preferred equity to be distributed around certain funding and operational milestones over the next two years.
A research note by Global Hunter Securities shows Chesapeake’s investment, relative to today’s equity value, as “insignificant in terms of changing the value of the company today,” but says the portfolio may not only put Chesapeake “on the leading edge of future uses of domestic natural gas, it could generate significant future value as these technologies take hold.”
