Oklahoma City-based Chesapeake Energy Corp. added another $510 million of purchases to its 2003 tally just before year-end, bringing its 2003 total deals to more than $1.7 billion. The newest purchases bring assets in the Midcontinent, Permian Basin and South Texas, increasing Chesapeake's year-end proved reserves 10% to more than 3.4 trillion cu. ft. of gas equivalent, and its projected 2004 production 9% to 890 million cu. ft. equivalent per day. Chesapeake hedged 100% of the gas production expected from the acquired properties at $5.68 per thousand cu. ft. for 2004 and $5.37 for 2005. By locking in these prices, Chesapeake expects to earn back more than 40% of its investment in free cash flow in two years of production, including $80 million in capital expenditures on the properties. In the largest of the three deals, Chesapeake will buy privately held Concho Resources Inc., Midland, Texas, for $420 million. In 2002, Concho, which was co-founded by Timothy A. Leach, Steven L. Beal, David W. Copeland and David A. Chroback with Yorktown Energy Partners and other investors, acquired the assets of Ricks Exploration Inc., forming Concho's asset core. Ricks was based in Oklahoma City. Concho's focus is primarily in the Permian Basin and Midcontinent. The other two purchases are asset transactions totaling $90 million, and are in the Permian Basin and Goliad County, South Texas. In the latter deal, Chesapeake will gain a 50% interest in a large prospect area in which it already owns a 37.5% working interest through its 2002 acquisition of Canaan Energy Corp. Through the three deals, Chesapeake will acquire an internally estimated 320 billion cu. ft. of gas equivalent of proved reserves, 195 billion of probable and possible reserves and current production of 70 million per day. The proved reserves have a reserves-to-production index of 12.5 years, are 75% gas and are 67% proved developed. After allocating $70 million of the purchase price to unevaluated leasehold, probable and possible reserves, and gas-gathering systems, Chesapeake estimates the acquisition cost per thousand cu. ft. of gas equivalent of proved reserves will be $1.38. Including leasehold and anticipated future drilling costs, the company estimates its all-in acquisition cost will be $1.59 per thousand cu. ft. equivalent. Initial lease operating expenses on the acquired properties are expected to average 56 cents per thousand, compared with Chesapeake's company average of $0.52 during the first three quarters of 2003. Moody's Investors Service calculated the price at $9.43 per BOE of proved reserves and approximately $43,000 per BOE of current daily production. Both figures are higher than the U.S. average, but Moody's does not anticipate any negative impact on Chesapeake's ratings. "Chesapeake has been a very aggressive acquirer and it maintains high leverage on reserves for its existing ratings," Moody's reports. "At the current [debt] ratings, high leverage has been tempered by a sound proven developed reserve life, attractive hedging, considerable scale and diversification, and the favorable relative regional price realizations in the Midcontinent." The company intends to finance the acquisitions with debt and equity. -Jodi Wetuski
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