Building on its existing relationship with French oil major Total, Chesapeake Energy Corp. (NYSE:CHK) completed yet another joint venture to continue its progress developing unconventional resources—this time in the Ohio portion of the Utica Shale play.
The transaction with Total E&P USA Inc., a wholly owned subsidiary of Total SA, calls for Total to acquire an undivided 25% interest in nearly 619,000 net acres in a 10 county area of the liquids-rich eastern Ohio portion of the Utica Shale. Of the JV acreage, approximately 542,000 net acres were contributed to the JV by Chesapeake (for a consideration per net acre of roughly $15,000) and approximately 77,000 net acres were contributed by Houston-based EnerVest Ltd. and its affiliates.
Total will also acquire a 25% share of all additional acreage acquired by Chesapeake in the area of mutual interest and will participate with Chesapeake and EnerVest in midstream infrastructure related to production generated from the assets with a 25% interest.
Chesapeake, the operator of the joint venture, put the combined value of the transaction, which closed on Friday, December 30, 2011, at US$2.32 billion, of which approximately $2.03 billion was received by Chesapeake and approximately $290 million by EnerVest. Chesapeake said about US$610 million was paid to the company in cash at closing. According to a Total press release, the French company paid Chesapeake and EnerVest about US$700 million in cash for the assets and will be committed to pay up to US$1.63 billion more over a maximum period of 7 years in the form of a 60% carry of Chesapeake and EnerVest’s future capital expenditures on drilling and completion of wells within the joint venture.
Liquids-rich Ohio acreage
It may come as no surprise to some that the largest deal thus far in the short life of the emerging shale play comes at the hands of Chesapeake who, in July, made headlines with its bold prediction that its “industry-leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15 - $20 billion in increased value to the company.”
In late September, the company disclosed peak rates nearly three times its initial report from four Utica Shale wells in eastern Ohio and western Pennsylvania, spurring Jefferies & Co. Inc. (who acted as financial advisor to Chesapeake on this latest transaction) analysts to mention the “encouraging results” that “bode well for the future of the play.”
Not only may the liquids-rich Ohio Utica Shale be economically viable, it may be one of the lowest cost shale plays, noted Christopher Perry, the Energy Group Supervisor of the Ohio Department of Natural Resources’ Division of Geological Survey.
Yves-Louis Darricarrere, Total Exploration & Production's president, stated, "Total is delighted to be building on our technical successes with Chesapeake in the Barnett Shale JV and to expand into the liquid-rich Utica Shale play in Ohio. This is consistent with our strategy to develop positions in unconventional plays with large potential and, in this case, with value predominantly linked to oil price.”
Continued JV streak enough to cover funding gap?
As Chesapeake CEO Aubrey McClendon stated in the company press release, “This Utica transition is our seventh significant JV and in these seven JVs, Chesapeake has sold approximately 1.5 million net acres for total leasehold consideration of $14.8 billion while retaining 3.6 million net acres as of the JV date with an indicated value by the JV partners of $45.7 billion."
One such JV is the existing one between Chesapeake and Total in the Barnett Shale. In December 2009, the French energy giant paid US$2.25 billion to acquire a 25% interest in Chesapeake’s Barnett Shale acreage. As Total CFO Patrick de la Chevardière told OGFJ in an April 2010 interview, the companies were looking to “study certain other North American shale gas opportunities together as well.”
The JV streak is viewed positively by Global Hunter Securities. “The value that CHK has generated to date through its JV strategy is hard to argue with,” noted the analysts in a January 3 note to investors. “2012 will likely mark another year filled with such asset monetization, given management’s track record of delivering on getting these deals done, we’re less inclined to be worried about the shortfall between operating cash flow and capex that will be present this year,” they continued.
According to Jefferies & Co. calculations, approximately 18% of the Chesapeake’s 2012 funding gap–estimated to be $8 billion–has been bridged by the Utica JV carry (with an estimated $470 million to be received in 2012), roughly $600 million of cash proceeds from a recently announced midstream dropdown, as well as a projected $342 million of cash on hand as of year-end 2011 (which embeds the $610 million Utica upfront payment).
Jefferies analysts, in a note to investors January 3, say other monetizations, including a sell-off of its stakes in FracTech and Chaparral, an IPO of Chesapeake Oilfield Services, VPPs and royalty trusts, joint ventures in Mississippian Lime and the Williston Basin, and potentially more midstream dropdowns could also help bridge the funding gap. “As these monetizations bridge the funding gap, CHK shares could begin to reflect more of the upside reflected in our $35/shr NAV. However, the asset sales may not be completed when the funds will be needed, and therefore the funding gap could continue to be an overhang for the stock.”
