Seeking Alpha
Oil & gas, commodities, long/short equity, research analyst
Profile| Send Message|
( followers)  

Chesapeake Energy (NYSE:CHK) has signed a definitive agreement to sell yet another significant acreage package in the Marcellus and Utica, this time in southwestern Pennsylvania.

The acquirer, EQT Corporation (NYSE:EQT), will be purchasing approximately 99,000 net acres prospective for the Marcellus and Utica shales and 10 horizontal Marcellus wells, located in Washington County, PA, from Chesapeake and Statoil (NYSE:STO) for approximately $113 million. In its press release this morning, EQT disclosed key metrics of the transaction that shed some light on the valuation of acreage in some of the more sought-after areas of the play. According to EQT, of the total purchase price, $53 million is allocated to the existing ten Marcellus wells, while the remaining $60 million is for the undeveloped acreage.

Three of the ten acquired Marcellus wells are currently producing, and the remaining seven will be turned in line by year-end 2013. These existing wells have an average lateral length of 4,200 feet and in total represent about 54.0 Bcfe of proved developed reserves. The disclosure provides an important hint with regard to the expected EURs for the acquired wells. Assuming that the three producing wells have remaining reserves of 2-4 Bcf per well, the average EUR for the seven wells to be turned in line appears to be in the 6-7 Bcf per well range.

The transaction values proved developed reserves at approximately $1.00/Mcfe. Assuming that the seven non-producing wells have been completed and are waiting on pipeline, the price implies a discount rate in a 12%-15% range, based on current commodity strip pricing (if the wells are cased but have not been completed, the implied discount rate would probably be closer to 10%).

The acreage being acquired includes 67,000 Marcellus acres and 32,000 dry Utica acres. EQT believes that approximately 42,000 Marcellus acres of the total position are unlikely to be developed due to near-term lease expirations or a scattered footprint. The remaining 25,000 Marcellus acres are located within EQT's core Marcellus development areas of Washington, Greene, and Allegheny counties (the county map of Southwest Pennsylvania is shown below). This core acreage is conducive to development through the Company's preferred use of multi-well pad drilling and extended laterals.


(Click to enlarge)

(Source: Range Resources April 2013 Investor Presentation)

Excluding the 42,000 expiring acres, the remaining ~56,000 undeveloped Marcellus and Utica acres are valued at approximately $1,071 per acre. If only 25,000 "core" Marcellus acres were counted, the valuation would imply $2,400 per undeveloped acre. Both metrics are a far cry from valuation levels implied by precedent transactions just a few years ago which were often priced in the $4,000-$5,000 per acre range or higher.

Based on industry data, at least part of the acreage (if not its entirety) may be located in the dry gas window of the Marcellus (wells drilled by Chesapeake are represented by brown dots on the map below).


(Click to enlarge)

(Source: Range Resources April 2013 Investor Presentation)

Still, the area appears to fall within EQT's estimated 9 Bcf per well EUR corridor in the Southwest Pennsylvania.


(Click to enlarge)

(Source: EQT Corporation April 2013 Investor Presentation)

Given the exceptionally strong well results reported by EQT in its most recent quarter report, the proved reserve estimate for the ten existing wells drilled by Chesapeake may understate the productive potential of future wells to be drilled (which will use optimized completion designs and should benefit from the efficiencies of pad drilling). Upon close of the transaction, EQT anticipates drilling four wells on the new acreage in late 2013. This acquisition will not have a significant impact to EQT's 2013 capital budget or sales volume guidance, which was recently increased to 340-350 Bcfe.

This morning's announcement follows Chesapeake's agreement to sell 162,000 acres prospective for the Marcellus in Northeast Pennsylvania, some of which also appear to be located in the "core" and "Tier 1" part of the fairway, to Southwestern Energy (NYSE:SWN) for a similarly low price of $93 million (full analysis provided here).

Conclusions

The transaction highlights an important shift that has occurred in the U.S. oil and gas M&A market over the past approximately eighteen months: as it comes down to undeveloped properties, even in the most prolific plays, it is a buyer's market. Operators' hands are often full with multi-decade inventories of development acreage and appetite to commit scarce capital to purchasing additional acreage (only to add it at the end of the multi-year drilling queues) is clearly not there. The flow of foreign investment capital that has fueled JV valuations in U.S. shale plays has also visibly dwindled. Moreover, JV investors have become more savvy in properly valuing shale opportunities.

As many shale plays are entering full development mode, acreage concentration and control of infrastructure are increasingly important factors that often define the economics and pace of the development. Operators with dominant operating positions in specific areas and strong balance sheets will be able to find attractively-priced consolidating "bolt-on" acquisition opportunities around their acreage.

Investors may wish to critically re-assess values of undeveloped acreage positions that many operators carry on their books.

Disclaimer: This article is not an investment recommendation. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. This article is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Source: Chesapeake Sells Another Marcellus Package At Low Valuation: Transaction Analysis