Chesapeake Energy Corporation has entered into four independent agreements with private sellers of oil and natural gas assets located in South Texas, East Texas and the Permian Basin for an aggregate of $686.4 million in cash. Through these transactions, Chesapeake anticipates acquiring an internally estimated 566 billion cubic feet of natural gas equivalent (bcfe) proved, probable and possible (3P) reserves, comprised of 289 bcfe of proved reserves and 277 bcfe of probable and possible reserves. Current net production is an estimated 61 million cubic feet of natural gas equivalent (mmcfe) production per day from 405 existing wells.
After allocating $255.2 million of the $686.4 million purchase price to the 98,000 net acres of leasehold (and related probable and possible reserves) being acquired from the sellers, Chesapeake's acquisition cost for the 289 bcfe of internally estimated proved reserves will be $1.49 per thousand cubic feet of natural gas equivalent (mcfe). Based on the company's projected development plan which includes $683 million of anticipated future drilling and development costs, Chesapeake estimates that its all-in cost of acquiring and developing the 566 bcfe of 3P reserves will be $2.42 per mcfe.
The proved reserves associated with these acquisitions have a reserves-to- production index estimated at 13.0 years, are 89% natural gas, are 36% proved developed and have current lease operating expenses of $0.32 per mcfe. The properties are located in areas where Chesapeake already has extensive drilling and producing operations.
On the acquired properties, Chesapeake has identified 276 proved undeveloped and 375 probable and possible drilling locations. Pro forma for these acquisitions, Chesapeake believes that it will own an internally estimated 5.4 trillion cubic feet of natural gas equivalent (tcfe) of proved oil and natural gas reserves and more than 4.0 tcfe of unproven reserves as of December 31, 2004.
Chesapeake has hedged 100% of the 1,200 barrels of current oil production from the acquired properties at NYMEX oil prices of $58.44 per barrel for 2005 and $57.98 per barrel for 2006. In addition, the company has hedged 100% of the 54,000 mmcf of current gas production from the acquired properties at NYMEX gas prices of $7.65 per mmbtu for 2005 and $7.53 mmbtu for 2006, levels well above the prices used to value the acquisitions.
Chesapeake has recently closed one of the transactions for approximately $228 million in cash and expects to close the remaining acquisitions by May 31, 2005. The pending acquisitions are subject to customary closing conditions and purchase price adjustments but are not conditioned on the closing of any of the other transactions. Chesapeake intends to finance the acquisitions by issuing a combination of senior notes and preferred stock. As a result of these acquisitions and the financings contemplated herein, the company has updated its Outlook, which is attached to this release as Exhibit "A". The company's previous Outlook, dated February 22, 2005, is attached as Exhibit "B" for comparative purposes.
The sellers include Houston-based Laredo Energy II, L.L.C. and its partners; Houston-based Pecos Production Company; Midland-based Rubicon Oil & Gas I, L.P. and a Dallas-based independent oil and gas company. Laredo was advised by Petrie Parkman & Co. of Houston and Pecos was advised by Waterous & Co. of Houston.
Management Comment
Aubrey K. McClendon, Chesapeake's Chief Executive Officer, commented, "We are pleased to announce these acquisitions for several reasons. First, they will add to our growing presence in South Texas, East Texas and the Permian Basin, all areas of increasing importance to Chesapeake. Second, these acquisitions have all of the attributes of successful previous Chesapeake transactions -- acquisitions from private companies of low-cost, high-margin proved producing natural gas reserves, exploitation potential of proved undeveloped, probable and possible reserves and finally, exploration potential for new reserves. In addition, the acquisitions are heavily-weighted to natural gas and the properties have attractive operating and future development costs. We are confident that Chesapeake can deliver significant shareholder value from the acquired properties for years to come."
