Chesapeake has agreed to acquire $200 million of south Texas natural gas assets from Houston-based privately-owned Laredo Energy, L.P. and its partners. In this transaction, Chesapeake will acquire an internally estimated 196 bcfe of reserves, of which 108 bcfe are proved and 88 bcfe are probable or possible. After allocating $48 million of the $200 million purchase price to unevaluated leasehold for the probable and possible reserves and exploratory acreage, Chesapeake's acquisition cost per mcfe of proved reserves will be $1.41. Including future leasehold and drilling costs for fully developing the proved, probable and possible reserves, Chesapeake estimates that its all-in acquisition cost for the 196 bcfe to be acquired will be $1.51 per mcfe.
Current production from the acquired properties is approximately 30 mmcfe per day. The proved reserves have a reserves-to-production index of 10 years, are 100% natural gas and are 32% proved developed. Initial lease operating expenses on the acquired properties should average $0.09 per mcfe, compared to $0.52 per mcfe for Chesapeake during the first three quarters of 2003 and approximately $0.70 per mcfe for the company's peer group during the first three quarters of 2003. The company has hedged 100% of the projected Laredo production volumes at average NYMEX prices of $5.76 per mcf for November and December 2003 and $5.20 per mcf for the full-year 2004.
The Laredo acquisition is scheduled to close on October 31, 2003. The company intends to finance the acquisition using cash on hand and borrowings from its bank credit facility. Chesapeake expects to repay these borrowings using its excess cash flow in the months ahead and has not yet made a decision on whether or how to permanently finance the Laredo acquisition.
The Laredo properties are located in the Zapata County portion of the south Texas Lobo Trend. Over the past two years, Chesapeake has built a growing operational presence in south Texas where the company believes its deep drilling, 3-D seismic and tight sands expertise can provide competitive advantages and attractive returns on its invested capital.
