Chesapeake changes its view on Permian basin potential

Independent buys $510M in assets where it had considered pulling up stakes

Petroleum News

Deal-minded Chesapeake Energy has dramatically strengthened its position in the U.S. Permian basin, a region of the country where not long ago the predominantly natural gas producer said it would pull up stakes to focus on its prize exploration and development area, the U.S. Midcontinent.

Of the $510 million in property acquisitions announced by the Oklahoma-based independent in late December, roughly three-quarters of “the deal” involved the Permian basin of West Texas and northeastern New Mexico, Audrey McClendon, Chesapeake’s chief executive officer, told analysts in a conference call.

Only about 15 percent of the assets being purchased by Chesapeake in three separate deals are located in the Midcontinent and the rest in South Texas and onshore Gulf Coast, he said.

In late 2002, Chesapeake said it wanted to sell or trade its Permian assets, which the company had inherited in previous deals and had no real interest in keeping. But when the company “put it all together” and “hired a good team” to look at the Permian, Chesapeake decided it liked what it already had and began to look for more, McClendon said. He also said that several new players had moved into the Midcontinent and “moved acquisition values a little higher than we like.”

However, the Midcontinent will remain Chesapeake’s primary core area, where about 90 percent of the company’s current assets are located. “Our focus will be on the Midcontinent,” McClendon emphasized, adding that Chesapeake would continue to shop for properties in the Midcontinent, as well as in the Permian and Gulf Coast regions.

In its latest transactions, Chesapeake said it would buy privately owned Concho Resources for $420 million and two smaller properties from unidentified sellers for $90 million. The combined assets hold an estimated 320 billion cubic feet of gas equivalent and produce a combined 70 million cubic of equivalent per day, Chesapeake said.

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Chesapeake said that the $420-million Concho acquisition, expected to close at the end of January, would rank Chesapeake among the 20 largest producers in the Permian basin, with 350 billion cubic feet of gas equivalent. Concho, based in Midland, Texas, was founded in association with New York-based Yorktown Energy Partners. In 2002, Concho bought the assets of Oklahoma-based exploration and production independent Ricks Exploration, which formed the core of Concho’s assets in both the Permian Basin and Midcontinent.

Of the $90 million involved in the two smaller transactions, $25 million was for properties in the Permian and $65 million for properties in Goliad County, Texas, Chesapeake said, adding that one of the deals already had closed and that the other was expected to close in January.

Chesapeake said it would realize an additional $150 million value net to the company over the next two years because of strong hedging positions placed on the production it was acquiring.

“The dramatic increase in oil and natural gas prices during the past few weeks has given us the ability to lock in 100 percent of our anticipated gas production volumes from (these) acquisitions at prices well above the price decks we used to purchase these properties,” Chesapeake’s McClendon said.