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Chesapeake buys Columbia Natural Resources $2.2 billion Appalachian purchase makes Chesapeake third largest holder of proved gas reserves in U.S. Lower 48 states Ray Tyson Petroleum News Contributing Writer
Oklahoma-based exploration and production independent Chesapeake Energy has stepped way out of its traditional hunting grounds, agreeing to buy privately held Columbia Natural Resources and its vast natural gas assets spread across five eastern U.S. states in the Appalachian basin.
The $2.2 billion cash deal would transform Chesapeake into the third largest holder of proved gas reserves in the U.S Lower 48 states, trailing only super-majors ExxonMobil and ConocoPhillips.
Chesapeake had its eye on the Appalachian basin for three years before settling on Columbia Natural Resources, Aubrey McClendon, Chesapeake’s chief executive officer, said in an Oct. 4 conference call explaining the transaction. “We really do see this area as the last frontier for American onshore gas exploration,” he added.
He noted that while the Appalachian basin already has produced more than 46 trillion cubic feet of natural gas from more than 400,000 wells, a National Petroleum Council study estimated the region contains another 9 tcfe of proved reserves and 68 tcf of additional unproven reserves.
Moreover, McClendon said less than 1 percent of the 400,000 wells so far drilled in the Appalachian region have penetrated below 7,500 feet, “leaving substantial deeper exploration opportunities available for Chesapeake to pursue.” More rigorous approach planned The Appalachian basin, nearly three times the size of Oklahoma at 185,000 square miles, is made up largely of small to medium-size E&P independents and several large pipeline and utility companies. The region is said to be rich in unconventional coalbed methane and shale plays, something Chesapeake is quite familiar with, along with deep-gas drilling.
“We’re confident that a new and more rigorous scientific approach to develop the millions of acres of potential shale plays in the Appalachian will result in much more gas to be found,” McClendon said.
Columbia Natural Resources, the principal subsidiary of Triana Energy Holdings, produces a modest 125-million cubic feet of gas per day and is a leading producer in the region. But the company’s resource base is said to be huge, spread primarily across West Virginia, Kentucky, Ohio, Pennsylvania and New York.
Columbia Natural Resources’s independent third-party engineering report puts the company’s proved, probable and possible reserves at 3.9 trillion cubic feet of gas equivalent, or 1.4 tcfe (56 percent) more total reserves than the 2.5 tcfe currently recognized by Chesapeake.
“We’re not saying the third-party report is inaccurate,” McClendon said. “We’re simply saying that we have been very cautious in our initial recognition of reserves. We are hopeful over time that we can become comfortable with booking that … extra gas the seller believes is there.” Acquisition includes 3.1 million acres Based on Chesapeake’s reserve numbers, Chesapeake proved reserves would jump from 6.0 trillion cubic feet of gas equivalent to 7.1 tcfe, an 18 percent increase. When including all reserve categories, the company’s total would soar from 11.0 tcfe to 13.5 tcfe, a hefty 23 percent increase.
Moreover, the 125 million cubic feet of daily gas equivalent production acquired from CNR would boost Chesapeake’s total daily production to 1.46 billion cubic feet of equivalent, a 9 percent increase.
Chesapeake also would acquire 3.1 million acres of onshore U.S. property, to go along with its own 4.1 million acres of onshore inventory. “In CNR, we are acquiring a truly massive gas resource base,” McClendon noted. The deal is expected to close in December, making Chesapeake the fifth largest producer of natural gas and second largest independent gas producer in the United States.
However, Chesapeake believes production on CNR properties can be increased above current levels. Because CNR’s assets always have been owned by either a utility or by leveraged private equity, “we believe the assets have been significantly underexploited,” Chesapeake’s McClendon explained.
McClendon said Chesapeake intends to boost capital spending on CNR assets to $200 million a year from the current $65 million and increase the number of drilling rigs to 10 from the current four. “We would expect to deliver a 5-to 10 percent production growth rate,” he added. 9,400 drilling locations identified Chesapeake thus far has identified 9,400 drilling locations on CNR properties, giving Chesapeake a total inventory of 23,400 drilling sites, McClendon said, adding that CNR had identified about 7,000 locations “that we are not yet ready to recognize. But we hope that we will be able to do so over time.”
CNR represents a major regional expansion for Chesapeake, which operates primarily in the U.S. Midcontinent areas of Oklahoma, Arkansas, Kansas and the Texas Panhandle, as well as in the Permian basin of western Texas and eastern New Mexico, in the Ark-La-Tex basin of eastern Texas and northern Louisiana, and in the south Texas and Texas Gulf coast regions.
In addition to CNR’s huge resource base, regional price differentials for natural gas were a major driver in Chesapeake’s decision to expand into the eastern United States, McClendon said, noting that gas prices in West Virginia, for example, were around $4 per thousand cubic feet higher than in Oklahoma and about $4.50 higher than in the Rocky Mountains and San Juan basin.
He also said that because of supply disruptions caused by hurricanes Rita and Katrina, “today you have a very real shortage of gas moving to the northeast from the Gulf Coast. While we are projecting that these (price) differentials will narrow somewhat in the months ahead, gas in the Appalachian basin will always be worth more than gas located further to the west and southwest.”
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