A $2 Billion Deal With Total The Latest Update For The Chesapeake Energy Joint-Venture Scorecard

| About: Chesapeake Energy (CHK)
This article is now exclusive for PRO subscribers.

Chesapeake Energy delivers again with another multi-billion dollar joint- venture deal involving the company's industry leading unconventional resource acreage.

This time the deal is with a repeat customer. Total (NYSE:TOT), which is already a joint-venture partner in the Barnett shale with Chesapeake (NYSE:CHK) has entered a Joint Venture in the Utica shale. Here are the details:

OKLAHOMA CITY, Jan 03, 2012 (BUSINESS WIRE) --Chesapeake Energy Corporation (NYSE: CHK today announced the completion of a joint venture ("JV") transaction with Total E&P USA, Inc., a wholly owned subsidiary of Total S.A. (NYSE:TOT, FP:FP) ("Total"), whereby Total acquired an undivided 25% interest in approximately 619,000 net acres in the liquids-rich area of the Utica Shale. Of the JV acreage, approximately 542,000 net acres were contributed to the JV by Chesapeake and approximately 77,000 net acres were contributed by Houston-based EnerVest, Ltd. and its affiliates ("EnerVest"). The JV area covers all or a portion of 10 counties in eastern Ohio (the "JV AMI").

The transaction, which closed on Friday, December 30, 2011, resulted in combined value of approximately $2.32 billion, of which approximately $2.03 billion was received by Chesapeake and approximately $290 million by EnerVest. Approximately $610 million was paid to Chesapeake in cash at closing and approximately $1.42 billion will be paid in the form of a drilling and completion cost carry, which Chesapeake anticipates fully receiving by year-end 2014.

Chesapeake will serve as the operator of the JV and will conduct all leasing, drilling, completing, operating and marketing activities for the project. The agreement provides that Total will acquire a 25% share of all additional acreage acquired by Chesapeake in the JV AMI. Total will also participate with Chesapeake and EnerVest in midstream infrastructure related to production generated from the assets with a 25% interest. ....end here

With this deal complete I think it is time to update our scorecard so we can quantify the unbelievable size of Chesapeake's combined joint-venture deals.

Here are the joint ventures to date:

  1. Haynesville joint venture with Plains Exploration (NYSE:PXP) - The timing on this one was extremely fortunate occurring as natural gas prices were over $10 immediately before the world fell apart in June 2008. Chesapeake sold 20% of its Haynesville acreage to Plains for $3.16 billion. That implied that the acreage retained by Chesapeake was worth $13.2 billion.
  2. Marcellus joint venture with Statoil (NYSE:STO) - At a time when deals couldn't get done Chesapeake got a deal done. In November 2008, Statoil paid $2.1 billion for a 32.5% interest in Chesapeake's Marcellus shale acreage. The implied value of the retained acreage for Chesapeake was $7 billion. The price received certainly reflected the market conditions of November 2008, but at the time Chesapeake needed to strengthen its financial position.
  3. Barnett Shale joint venture with Total - It is almost like Chesapeake is trying to learn new languages, this time teaming up with a French company. For $2.25 billion Total got a 25% interest in Chesapeake's Barnett shale properties, which implied that the retained value was $6.8 billion.
  4. Eagle Ford joint venture with CNOOC (NYSE:CEO) - Chesapeake put its Eagle Ford acreage position together with blinding speed in 2010. In November 2010 CNOOC bought a 33% interest in the land for $2.2 billion implying that Chesapeake retained a land position worth $4.4 billion.
  5. Niobrara joint venture with CNOOC - Same partner, different property. This time the Niobrara where CNOOC purchased a 33% interest for $1.3 billion implying that the retained value is $2.6 billion to Chesapeake.
  6. Utica Shale joint venture with Total - The French Oil company Total, which already completed a joint venture with Chesapeake on the Barnett shale, is back for more. Total will acquire a 25% interest in 542,000 of Chesapeake's Utica shale acres for $2.03 billion. $610 million of this is in cash at closing and $1.42 billion will be paid in the form of drilling and completion cost carry.

If you total up these deals you can see that the implied value of Chesapeake's retained value in these properties is at least $40 billion:



Proceeds BIL

Retained Value














Eagle Ford













As I've written in the past, that is $40 billion that has been created at a net cost of zero for Chesapeake shareholders as the cash from the joint venture-deals more than recovers what Chesapeake invested in the land in the first place.

What continues to confuse me is why these large oil companies keep doing small deals with Chesapeake at pretty fair prices. Why don't they go after 100% of Chesapeake, which they could get at a much cheaper price even with a significant premium to the current stock price?

With natural gas now sporting a $2 handle now is likely a perfect time for someone to take a run at Chesapeake. At some point in the future, surely natural gas prices have to recover and the asking price for Chesapeake along with it.

Disclosure: I am long CHK.