- The Money: $3.375
billion: $1.25 billion cash upfront; $2.125 billion in drilling costs over
2009-2012.
- The Position: CHK gives
up 32.5% of their Marcellus position (or 600,000 acres of their 1.8 million acre
position). The company had been looking to farm out 25% of their leading
position in the play but at the present time I think bigger will be viewed as
better.
- This is a 1/3 (just under) for
3/4s Carry. The future drilling costs are a 3/4 carry for Chesapeake
which will significantly reduce CHK’s need for capital in the play during the
play’s initial, most costly phase of development.
- Closing by year end. CHK
has been promising that some form of Marcellus deal gets done this
year.
- Valuation Implication:
This values the entire Marcellus play at $10.4 B ($3.375 B/32.5% interest).
CHK’s Enterprise value (Mkt cap + debt) was $26.1 B as of yesterday’s close. So
for $16 billion you get the #2 producer in the Barnett and Fayetteville Shales,
and the #1 player in the Haynesville Shale not to mention the rest CHK’s
holdings. When you consider they have not booked any reserves in the Marcellus
yet the market is valuing them at substantial discount to on a $/ Mcfe
basis.
- STO Put Reserve Numbers On The
Deal Providing A Little Outside Confirmation.
- STO said they are acquiring future
recoverable reserves of 2.5 to 3.0 billion barrels of oil equivalent. That’s
equal to 15 to 18 Tcfe to their interest.
- For CHK’s 62.5% interest that comes to 28
to 34 Tcfe. Put that up against CHK’s 3Q booked reserves for the entire company
of 12.1 Tcfe.
- STO Even Provided Some Long Range
Snap Shots on Production Growth. One of the benefits of dealing with
resource (manufacturing) plays is their predictability.
- STO made the comment they see production
to their interest of "at least" 50,000 Boepd by 2012 and "at least" 200,000
Boepd by 2020.
- Putting that into gas language and
adjusting to the higher working interest percentage for CHK that comes to
production net to CHK of just under 0.6 Bcfepd in 2012 and 2.3 Bcfepd by
2020.
- Compare that to CHK’s 3Q08 produciton of
2.3 Bcfepd.
- CHK To Keep Growing Marcellus
Acreage. CHK will keep adding and STO will have the right to
participate in the new leases at the same 32.5% working interest.
- Cause For Pause. There’s
always a catch and though this may be a harmless one analysts will probably be
dubious (it’s in their nature) of the statement that "CHK and STO have agreed to
enter in an international strategic allicae to jointly explore unconventional
natura gas opportunities worldwide". The CHK story is an onshore, U.S. only
natural gas story and the last thing people want to see them do is go on safari
looking for more gas.
- In A Nutshell… I think
its a good deal for the above reasons and because they needed to do it, because
they didn’t do it with BP (always good to diversify your deal basket), and
because it provides another opportunity for them to yell, "look at the implied
valuations man, we’re not crazy, another company sees it, why don’t
you???!!!"
- Likely Positive Implications
for: (XCO), (ATN), (PVA), and (RRC).
The above story is the opinion of the author only and it does not reflect
iStockAnalyst opinion. Further, the author is not personally advising you
regarding the suitability of the story for your investment needs. In no event
iStockAnalyst will be liable for any loss or damage including without
limitation, indirect or consequential loss or damage, or any loss or damage
whatsoever arising from or arising out of, or in connection with the use of this
information. Please consult your investment advisor before making any investment
decision.
