Oklahoma-based independent oil and natural gas company Chesapeake Energy Corporation (CHK) has inked its second deal with China’s top offshore oil producer CNOOC Limited (CEO) for the sale of stakes in its U.S. Niobrara shale project. The deal is expected to close in the first quarter of 2011.
Per the terms of the deal, CNOOC International, a unit of the parent company CNOOC Limited, will pay $570 million in cash for the undivided interest of 33.3% for Chesapeake’s 800,000 net oil and natural gas leasehold acres in the Denver-Julesburg (DJ) and Powder River Basins in northeast Colorado and southeast Wyoming.
CNOOC Limited will contribute around 66.7% of Chesapeake’s costs of up to $697 million to drill and complete wells in the area. There is also an option for CNOOC Limited to purchase 33.3% interest of any additional acreage acquired by Chesapeake in the basin.
Chesapeake currently acts as an operator of the project, with 16 producing wells in the regions. The company generated initial production rates of up to 1,000 barrels of oil and 3.0 million cubic feet of natural gas per day and aims to develop net unrisked unproved resource potential of up to 5.0 billion barrels of oil equivalent in the coming decades.
Following the investment from CNOOC Limited, Chesapeake expects to operate a respective 10 and 20 rigs by year-end 2011 and 2012 from the current level of 5 operating rigs.
Management of Chesapeake and CNOOC Limited remain highly upbeat regarding the continuous alliance of the two companies. In November, last year, Chesapeake sold its one-third undivided interest in the Eagle Ford Shale to CNOOC for $1.08 billion.
Chesapeake believes that accelerated drilling activities in the domestic energy arena will eventually reduce the country’s dependence on oil imports and also pave way for ample employment opportunities. In addition, this project is targeted vastly toward enhancing supply in the energy sector and reducing greenhouse gas emissions.
We believe that this collaboration will endow Chesapeake with the necessary capital required to support the development and exploration of its resources as well as strengthen business ties between U.S. and China.
Chesapeake currently retains a Zacks #3 Rank, which translates into a short-term Hold rating, while we have a Zacks #2 Rank (short-term Buy recommendation) on CNOOC Limited shares.
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