Ahead of the third quarter results (scheduled on November 3), the leading U.S. natural gas producer Chesapeake Energy Corporation (CHK) signed a deal with Chinese offshore major CNOOC Ltd. (CEO). As per this deal, Chesapeake has sold its one-third undivided interest in the Eagle Ford Shale to CNOOC for $1.08 billion.
CNOOC will also bear 3/4 of Chesapeake’s share of drilling and completion expenses until an additional $1.08 billion has been paid, bringing the total purchase consideration to $2.16 billion. The transaction is expected to close in the fourth quarter of 2010.
Though the agreement was signed yesterday, Chesapeake’s chief executive officer, Aubrey McClendon, had given hints about this deal (without naming names) mid-last month at an investor conference of Barclays Capital, an arm of Barclays plc (BCS) in New York.
Chesapeake has 600,000 net oil and natural gas leasehold acres in the Eagle Ford Shale project and currently engages 10 rigs developing this play. With the inflow of funds from CNOOC, the company expects to increase its activity by raising the number of rigs to 12 by the end of this year, 31 by year-end 2011 and to about 40 by year-end 2012. At the project’s peak, Chesapeake expects to produce 400,000 to 500,000 barrels of oil equivalent per day.
Development of shale plays by creating joint ventures with international companies is not a new thing for Chesapeake. Early this year, the company signed a $2.25 billion joint venture deal with France’s Total SA (TOT) to help develop its Barnett Shale properties in Texas. The industry players are likely finding this procedure more attractive for development of properties than using other sources of funding.
The Chesapeake-CNOOC deal also shows energy-hungry China’s keenness to accumulate international oil and gas properties.
As opposed to strictly natural gas, the Eagle Ford Shale is well known as a liquids-rich play. Chesapeake is also planning to deploy more capital to drill other liquids-rich plays such as GraniteWash, AnadarkoBasin, PermianBasinand RockyMountain.
Although we currently maintain our Neutral recommendation with a Zacks #3 Rank, we appreciate Chesapeake’s initiative of deploying more funds toward liquids, which is also reflected in its stock performance. Chesapeake shares rose 2.5% on Friday and have jumped more than 10% in the last four weeks.
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