The last time we checked in on Chesapeake Energy (CHK), the company had presented a plan to reduce long-term debt by 25% while maintaining a respectable 25% production growth rate over the next two years. Today's monetization of Chesapeake's 800,000-acre position in the Niobrara play - which spans two basins in Colorado and Wyoming-- will certainly help to advance the E&P's "25/25 Plan." It will also help Chesapeake in its quest to get oily.
Chesapeake's new Niobrara partner, China's CNOOC (CEO), is a familiar face. CNOOC entered into a joint venture in Chesapeake's Eagle Ford play last October. The Niobrara terms are similar, with CNOOC once again taking a one-third interest in Chesapeake's acreage through a combination of up-front cash and a "carry" of a portion of Chesapeake's future drilling costs, for a total of $1.27 billion.
The per-acre valuation works out to around $4,750 before discounting for the time value of money. That's less than half of what CNOOC paid to earn in to the Eagle Ford down in South Texas, as well as what companies like Williams (WMB) are forking over to grab a piece of the Bakken play in North Dakota. Chesapeake shares are up smartly today, so how do we square the evident enthusiasm with the lower price tag?
The simplest answer is that the Niobrara is at a much earlier stage of development than either of the aforementioned plays. The data points are encouraging, but limited to a relatively small number of early wells drilled by the likes of Noble Energy (NBL) in Colorado and SM Energy (SM) in Wyoming. As more commercially successful wells get drilled, and prospects mature, acreage will begin to fetch over $5,000 per acre - assuming oil prices remain strong.
The Chesapeake tide is lifting other Niobrara boats today, including Samson Oil & Gas (SSN) and Double Eagle Petroleum (DBLE). As with the Eagle Ford and other unconventional oil and gas plays, I expect the Niobrara to be a play with highly variable drilling results and economics. CNOOC is grabbing such a large swathe of land that it can probably count on some sweet spots to offset the acreage that proves uncommercial. With smaller, more concentrated players, the risk is higher of finding oneself in the wrong zip code, so keep a close eye on neighboring activity for hints that your Niobrara players are likely to see profits.
Disclosure: Author has no positions in companies mentioned.