Chesapeake Energy Corp. has a knack for putting cash in the bank. From selling non-core assets to volumetric production payments to (proposed) master limited partnerships, the company is now selling a giant chunk of an undeveloped resource play. The fact that Plains Exploration & Production Co. is willing to pay $3.3 billion---half down now and half on the installment plan---for a 20% piece of the action on acreage in the Haynesville shale play suggests the hoped-for gasified gold under them Haynesville hills is more than just a lot of hot air. The deal involves a 20% working interest in 550,000 Haynesville prospective acres both in northern Louisiana and East Texas for $1.65 billion. Beyond that Plains will fund half of all of Chesapeake's costs on its remaining 80% share up to another $1.65 billion. In addition, Plains has first dibs on 20% of any more acreage Chesapeake gets in the play. Chesapeake went to the alter and got married at the hip on its Haynesville operations in exchange for Plains' up-front endowment payment. Chesapeake's CEO Aubrey McClendon suggests the deal values the total 550,000-acreage position at $16.5 billion, leaving Chesapeake with about a $13.2 billion piece. The late-day breaking news kept the analysts up most of the night working out the details and implications. Calyon Securities' Jeb Armstrong estimates the transaction equates to a per-unit basis to $30,000 per acre and $1.39-$2.67 per Mcfe of net unrisked reserves, which the companies postulated to be some 23-44 Tcfe. Armstrong says the deal provides Chesapeake with a quick cash infusion. "While it still had ample liquidity available in its credit facility, the company may have been anticipating that by the end of Q2 it would have been able to raise $1 billion through the formation of an MLP and an additional $1.5 billion through the sale of its 85,000 net acres in the Woodford shale. The Woodford sale may still be in the works. However, spinning off an MLP right now would be extremely difficult. Since it had just tapped capital markets for almost $3 billion in equity and debt, selling a working interest in the Haynesville may have been the least worst way to get cash." At J.P. Morgan Research, Joe Allman calculates that Plains is paying $27,000 per acre, inclusive of the incremental $1.65 billion "promote" for drilling costs. Like Armstrong, he says the deal solves a short-term cash crunch for the big gas guys. "Chesapeake's aggressive buying of acreage in the Haynesville shale play and other spending apparently led CHK to a short-term cash crunch. Though CHK had to sell down an interest in its premium Haynesville asset, this JV transaction brings in $1.65B of cash, which satisfies CHK's immediate cash needs. Assuming an additional $1B in cash from its planned midstream partnership, CHK should not need to seek capital from outside sources to fund its current development budget. We view this transaction as a significant financial improvement for CHK." Analysts at Tudor, Pickering, Holt & Co. Securities call the transaction a "transcendent moment" for the Haynesville play and pinpoint that Plains is paying some $30,000 per acre for "some of the play's best acreage." They suggest Plains paid full value on current metrics. "Using the NPV of the $1.65B in drilling costs (assumed to be fully funded within 4 years) coupled with the upfront cash, PXP is effectively paying $3.03B for 110K net acres ($27.5K/acre). Under our Haynesville assumptions (50% acreage productive; 80-acre spacing; 6 Bcfe wells; $8/Mcf LT gas; $7MM well costs), PXP is paying NPV10 and is therefore betting on higher acreage productivity or gas prices. While we are not ready to change our underlying Haynesville assumptions, we must acknowledge PXP’s management team has an envious track record of buying/selling well." As the TPH gang succinctly puts it: "Giddy up!" Steve Toon, Editor, A&D Watch; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; email@example.com
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