Chesapeake says gas properties becoming more difficult to find

Ray Tyson

Petroleum News Houston correspondent

Natural gas producer Chesapeake Energy, which has readily used acquisitions to help boost reserves and production to record levels, said competition for good properties in the United States is intense while quality reserves are becoming more difficult to find as high commodity prices make them more expensive to buy.

“We have seen acquisition costs go up ... and we think acquisition costs will go up,” Aubrey McClendon, Chesapeake’s chief executive officer, told industry analysts in a Feb. 24 conference call on 2003 fourth-quarter earnings.

In addition to production gains from acquisitions, the Oklahoma-based independent — now the leading natural gas producer in the U.S Midcontinent — also had remarkable success through the drill bit last year. Overall, 2003 production rocketed 48 percent from the previous year to 268 billion cubic feet of gas equivalent. Of the 87 billion cubic feet of increase year-over-year, the company said 36 billion cubic feet was attained through “organic” growth or drilling and 51 bcf through acquisitions.

That put the Chesapeake’s organic growth rate at 20 percent compared to the prior year, well above the company’s initial projected growth rate of five percent and placing the company in the top three among mid-to large size independents.

Record production in the fourth quarter translated into a healthy profit of $62.4 or 25 cents per diluted share on revenues of $456.7 million, compared to 2002 fourth-quarter net income of $23.7 million or 13 cents per share on revenues of $258.4 million. Excluding charges, the firm’s net income in the fourth quarter would have been $94.9 million or 37 cents per share.

Despite the difficulty in finding good properties at the right price, Chesapeake said it has managed to stay ahead of the acquisition game through its own five-year “rolling inventory” of prospects. “We are prospect rich in a prospect poor industry,” Marcus Rowland, Chesapeake’s chief financial officer, told analysts.

Chesapeake further strengthened its U.S. position late last year with three separate deals totaling $510 million, including $420 million it paid for independent Concho Resources. In those transactions alone, the company picked up reserves of 320 bcf of gas equivalent and daily production of 70 million cubic feet of equivalent.

In June Chesapeake shareholders gave their approval to another acquisition, the $118 million takeover of Canaan Energy. In that transaction, Chesapeake gained reserves of about 100 bcf of equivalent. In 2000, Chesapeake took out Gothic Energy in a cash-and-stock buy valued at $345 million.

Chesapeake began 2003 with estimated proved reserves of 2.205 trillion cubic feet of gas equivalent and ended the year with record reserves of 3.169 tcf, an increase of 964 bcf of equivalent or 44 percent. Taking into account production of 268 bcf of equivalent, reserve replacement during the year was 1.232 tcf, or an astonishing 459 percent, at an enviable finding and acquisition cost of $1.36 per thousand cubic feet.

While production in the first quarter is expected to come in at the lower end of Chesapeake’s projected 78-79 bcf of equivalent, it would still be a 37 percent increase over the same quarter last year. The company’s 2004 production is expected to surpass last year by 21 percent.