On Sept. 7, Hess Corporation said it had formed a joint venture agreement with CONSOL Energy Inc. to acquire a 50% interest in CONSOL’s nearly 200,000 acres in the Utica Shale in eastern Ohio for aggregate payments of $593 million.
“We are delighted with our entry into the Utica Shale, which enables us to build a strategic acreage position in an emerging unconventional play in the United States,” said John Hess, chairman and CEO of Hess. “We believe that this acquisition offers significant potential for future growth in reserves and production with most of the land either owned in fee or held by production with high net revenue interests.”
Hess noted that CONSOL has a long history of operation in the Appalachian basin and will be a good partner for them in the Utica Shale.
Hess will pay CONSOL $59 million at closing, which is expected in October, and $534 million in the form of a 50% drilling carry of certain CONSOL working interest obligations over a five-year period. The joint exploration and development plan calls for Hess to operate approximately 80,000 acres in Jefferson, Harrison, Guernsey, and Belmont counties while CONSOL will operate approximately 120,000 acres elsewhere in eastern Ohio, including Portage, Tuscarawas, Mahoning, and Noble counties. Appraisal drilling is expected to begin in the fourth quarter.
An analyst for Jefferies & Co., which advised Pennsylvania-based CONSOL on the transaction, said that the implied metric of $5,900 per acre on an undiscounted basis (or $4,500 per acre discounting the carry at 10% per annum) compares favorably to recent lease bonuses of ~$2,500 per acre and also the PDC Energy transaction (also announced Sept. 7) at $1,670 per acre. While the price is below recent Eagle Ford deals, Jefferies says to keep in mind the Utica is at a much earlier stage in its development cycle with no publicly announced horizontal well results. The company added that the Hess-CONSOL transaction compares favorably to initial deals in other developing shale plays (Niobrara at $4,750 per acre; Eagle Ford at $3,000 per acre; and Marcellus at $5,600 per acre).
Meanwhile, Chesapeake Energy management recently noted it expects to announce its Utica joint venture by next month. Chesapeake has 1.25 million net acres in the play. Chesapeake has been the most active operator in the Utica with 10 horizontals drilled and five wells producing. The company currently has five rigs operating in the Utica with plans to increase the number to 16 to 20 by year-end 2012.
“We estimate [Chesapeake] will be outspending cash flows by ~$4 billion next year, which is to be funded with joint ventures in the Utica, Mississippi Lime, and possibly the Bakken along with other producing property monetization,” said Jefferies’ Biju Perincheril. “This year's estimated outspend of ~$6 billion is covered by asset sales completed to date.”
