2011-04-05-2011-02-22-2011-03-31

To acquire 487,000 net acres In AR Fayetteville shale, gaining 415 MMcfe/d, 2.5 Tcfe proved, midstream assets with approximately 420 miles of pipeline.

Oklahoma City-based Chesapeake Energy Corp. (NYSE: CHK) plans to sell all of its interests in the Fayetteville shale play in central Arkansas to BHP Billiton Petroleum, a wholly owned subsidiary of BHP Billiton Ltd. (NYSE: BHP), for $4.75 billion in cash.

The deal with BHP is part of Chesapeake's previously announced "25/25" initiative to reduce the company's long-term debt. As part of this strategy, the company recently unveiled plans to shed its Fayetteville position and its interests in privately held companies Chaparral Energy Inc. and Frac Tech Holdings LLC to raise a total of $5 billion.

Chesapeake's Fayetteville assets include 487,000 net acres, with production of approximately 415 million cubic feet of gas equivalent per day. Proved reserves as of Nov. 3 were 2.5 trillion cubic feet equivalent. The deal also includes midstream assets with approximately 420 miles of pipeline.

Chesapeake has also agreed to provide essential services for up to one year for BHP Billiton's Fayetteville properties for an agreed-upon fee.

"The Fayetteville shale is a world-class onshore natural gas resource," says J. Michael Yeager, BHP Billiton Petroleum CEO. "The purchase of this long-life field immediately adds over 10 trillion cubic feet of gas resources to our portfolio and is consistent with our strategy of investing in large, low-cost assets with significant volume growth for future development."

David Tameron, senior analyst at Wells Fargo Securities LLC, has provided headline metrics. "Assuming an unscientific $1 billion for the midstream (aspect), the transaction (is valued) at $9,036 per thousand cubic feet equivalent (Mcfe) per day, versus Chesapeake's current multiple of $10,500 (per) flowing Mcfe per day. Using Fayetteville proved reserves of 2,462 billion cubic feet equivalent (Bcfe) provided in early November...the value equates to $1.52 per Mcfe, based on a proven basis, and $0.48 per Mcfe, based on a 3P basis. On acreage, the deal came in at $7,700 per acre, after allocating at $1 billion for the midstream.

Tameron adds that the headline price "looks attractive, although we never get the full look behind the curtain."

The deal is expected to close in the first half of 2011. Jefferies & Co. Inc. is advisor to Chesapeake.

In early January, Aubrey McClendon revealed the "25/25 plan," which aims to reduce the company's long-term debt by 25% over the next two years by decreasing leasehold spending and through various asset monetizations, the Chesapeake CEO said in a public statement. Meanwhile, such activity is expected to trim the company's planned two-year production growth rate from an initial guidance of between 30% to 40%, to 25%.

Using the net proceeds from the BHP deal and its previously announced Niobrara joint venture with China's CNOOC Ltd. for $570 million, Chesapeake intends to retire up to $3 billion of its shorter-dated senior notes and to also reduce borrowings from its revolving bank credit facility.