Chesapeake announces 440,000 acre land swap

2014-08-01T00:15:00Z 2014-08-02T00:24:43Z Chesapeake announces 440,000 acre land swapBy BENJAMIN STORROW Casper Star-Tribune The Billings Gazette
August 01, 2014 12:15 am  • 

CASPER, Wyo. — Chesapeake Energy has announced a proposed 440,000-acre land swap in the Powder River Basin, a move aimed at boosting its oil production in the region.

The deal with RKI Exploration and Production, a private drilling firm, would net Chesapeake an additional 66,000 acres and increase the company’s daily oil production by the equivalent of 4,500 barrels.

The company estimated that it could recover the equivalent of 2 billion barrels of oil from its Powder River Basin assets after the deal is completed. The two parties are expected to close in August, Chesapeake said.

Under the terms of the agreement, Chesapeake would receive land in the Powder River Basin’s oil-rich southern reaches and send RKI properties in the basin’s northern half, which boasts bountiful natural gas reserves.

In a statement, Chesapeake CEO Doug Lawler said the Powder River Basin has the potential to be “a major oil growth engine for the company.”

“We are excited to increase our position in this outstanding asset and consolidate our acreage, working interest and operatorship in the southern end of the Powder River Basin,” Lawler said.

On Tuesday, the Oklahoma City-based company also announced its plans to spend $1.26 billion to repurchase preferred shares of its subsidiary,

CHK Utica.

Chesapeake sold shares in CHK Utica to raise money for a drilling program in Ohio, but third-party ownership of those shares was costing the company $75 million in annual dividend payments.

The dual moves are the latest in a series of steps taken by Lawler to move Chesapeake away from natural gas assets acquired under the company’s former executive, Aubrey McClendon, and into oil-rich plays, analysts said.

McClendon was forced out last year after Chesapeake nearly ran out of cash.

“Transactions like this remove some of the legacy issues that were there,” said David Neuhauser, founder and managing director of the Illinois-based energy hedge fund Livermore Partners.

Chesapeake is the United States’ second-biggest natural gas producer. The move to expand its Powder River Basin oil portfolio comes after a monthslong slide in natural gas prices.

The spot price at Henry Hub, which briefly reached as high as $8 per million British thermal unit in February, was below $4 Monday.

Oil plays offer companies a more diverse asset portfolio and enable companies to offer a more sustainable return to investors, Neuhauser said.

“Immediately it doesn’t do anything fantastic, and some might see it as a negative because of the huge outlay of cash,” he said. “But over time, this will go a long way in keeping the longevity of the company moving forward.”

The swap would net 137,000 acres for Chesapeake, its interest in 67 wells in the northern part of the Powder River Basin and $450 million to RKI. In exchange, Chesapeake would receive 203,000 acres and its stake in 186 wells in the southern Powder River Basin.

The Powder River Basin has shown potential to be a rich oil play for Chesapeake. A recent test well drilled in the Sussex formation has produced the equivalent of 232,000 barrels of oil in 150 days, or about 1,500 barrels of oil per day.

Drilling costs in the region have also fallen, Chesapeake said. The company recently completed a 9,600-foot horizontal well in the Niobrara formation in 32 days at a cost of $5 million.

A 2013-vintage Niobrara well was 5,300 feet, and average drilling costs were $6.6 million, Chesapeake said.

The company said it hopes each well would exceed a rate of return of 40 percent.

Charles Mason, a professor of petroleum economics at the University of Wyoming, agreed that the move from north to south signals that Chesapeake is looking to expand its oil holdings.

“It is not a big, bold move, but it is not a little tiny move,” Mason said. “It is a more valuable resource.”

Chesapeake stocks were up 22 cents to $27.06 following trading Tuesday.

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