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Chesapeake pays hefty premium for Louisiana field Greystone deal pushes independent’s 2004 acquisition total to nearly $1 billion Ray Tyson Petroleum News Houston Correspondent
Rapidly growing independent Chesapeake Energy, with more than seven months remaining in the year, pushed its 2004 acquisition total to nearly $1 billion with the announced $425 million purchase of Greystone Petroleum’s interest in the prolific Sligo gas field in northern Louisiana.
“I think this will go down as one of our best transactions,” Aubrey McClendon, Chesapeake’s chief executive officer, told analysts in a May 11 conference call explaining the rationale behind the hefty premium Chesapeake is paying for the Greystone property.
“To many of you this will look a little pricey at $1.68 per thousand cubic feet of gas equivalent,” McClendon acknowledged.
In fact, when including anticipated future drilling costs for fully developing the proved, probable and possible reserves at Sligo, the company estimated its “all-in acquisition cost” would be $1.94 per thousand cubic feet of gas equivalent.
Nonetheless, he said, when considering today’s strong natural gas prices, the strong hedging position Chesapeake is taking on Sligo production, the field’s low operating expenses and upside reserve potential, “we are very satisfied with the value … we have here.”
A future collapse in natural gas prices would be the only thing that would turn a good deal into a bad one, McClendon said.
“We try to mitigate that risk specifically through hedging this deal,” he said, adding that Chesapeake’s first 13 months of production from Sligo is hedged at a comfortable $6.25 per thousand cubic feet of gas equivalent. Field has already produced 1.6 tcf Through the Greystone transaction, Chesapeake said it expects to acquire an estimated 214 billion cubic feet of gas equivalent proved reserves, 51 billion cubic feet of probable and possible reserves, and daily production of 45 million cubic feet of equivalent.
“It’s very unusual today being able to acquire one field that is producing 45 million cubic feet of gas — a giant field that’s already produced 1.6 trillion cubic feet since discovery” in 1938, McClendon said.
Chesapeake’s official 265 billion cubic feet of equivalent reserve estimate for the Greystone property is conservative, he said, adding that Chesapeake believes Sligo contains from 500 billion to 1 trillion cubic feet of remaining gas reserves.
“The resource in place is at least twice what we have booked, and we think it could be three to four times as well,” McClendon said. “So this type of asset we think will continue to give us reserve revisions going forward.” Surprises predicted on future production He said to expect “surprises” on future production as well, noting that small, private independent Greystone was able to increase daily output to 45 million cubic feet from 10 million feet cubic during the short time it had the property.
Chesapeake said it plans to increase daily production from the Greystone properties by about 50 percent to 65 to 70 million cubic feet of gas equivalent through a two to four-rig drilling program during the next 12 to 18 months. Chesapeake said it has identified about 70 proved undeveloped and 75 probable and possible locations on the acreage.
Greystone’s position specifically covers 16,100 gross acres over the crest of the Sligo Field, which produces gas from the Rodessa, Pettit, Hosston and Cotton Valley formations at depths of 4,100 feet to 9,600 feet. Project production would exceed 950 million cubic feet per day With the Greystone property, Chesapeake’s proved oil and natural gas reserves would increase to roughly 3.8 trillion cubic feet of natural gas equivalent, and its projected June 2004 production would exceed 950 million cubic feet of natural gas equivalent per day.
Chesapeake also is increasing its 2004 production forecast by 3 percent or 11 billion cubic feet of gas equivalent to a range of 341-347 billion cubic feet of equivalent. About 9.7 billion cubic feet of the increase was attributed to the anticipated production from the Greystone transaction, while 1.3 billion cubic feet was attributed to anticipated higher production from better than expected recent drilling results.
Chesapeake said it intends to finance the Greystone acquisition using a combination of proceeds from a new private issue of senior notes, borrowings from the company’s newly expanded $500 million bank credit facility and cash on hand. The deal is expected to close June 2. Greystone formed in 1995 Greystone was formed in 1995 by Joe Bridges and Michael Geffert, who later were joined as equity holders by the private equity firm First Reserve Corp. to help fund Greystone’s acquisition of interests in the Sligo Field in 2002.
Prior to the announced $425 million Greystone acquisition, deal-minded Chesapeake had closed acquisitions totaling $570 million for the year. The company said in an April conference call on 2004 first-quarter earnings that it had no immediate plans for another acquisition.
“At the time there was an … offer on the table and it looked like there would be no opportunity for us to be in that (Greystone) asset,” McClendon said. “We were able to get to front of some other people who should have had this transaction.”
Again, McClendon said Chesapeake is not contemplating another large deal anytime soon, “but there’s always a chance something will change down the road.”
On the other hand, McClendon said, Chesapeake remains “very active” in the small acquisition market. “I know there are a couple $20 million deals, one of which we’ve entered into and pursuing right now,” he added.
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