Chesapeake acquires $590M in properties

Company’s aggressive nature has transformed it into the fifth largest independent producer of natural gas in the U.S.

Ray Tyson

Petroleum News Houston Correspondent

Chesapeake Energy, whose production is soaring through both acquisitions and an exceptionally active drilling program, is acquiring another $590 million worth of oil and gas properties located in South Texas and the U.S. mid-continent from three separate private companies.

Chesapeake’s aggressive nature has now transformed the Oklahoma-based company into the fifth largest independent producer of natural gas in the United States, with a record 76.5 billion cubic feet of output reported in the 2004 second quarter.

The company’s total production in the recent quarter of 86.5 billion cubic feet equivalent was 88 percent weighted to gas and represented a 29 percent increase compared to the same period last year and a 10 percent increase from the previous quarter.

The company projected in a July 26 conference call with industry analysts that it expects additional 5 percent increases in production in this year’s third and fourth quarters.

Chesapeake’s latest transactions provide the company with additional estimated proved reserves of 310 billion cubic feet of natural gas equivalent, estimated probable and possible reserves of 453 billion cubic feet of equivalent, 50,000 acres of leasehold, and extra daily production of 60 million cubic feet of equivalent.

The proved reserves are 92 percent gas, 97 percent company-operated, 35 percent proved developed and have current lease operating expenses of just 29 cents per thousand cubic feet of equivalent, about 60 percent below the industry average.

“These very low lease operating expenses create unusually high economic values … and add to the attractiveness of Chesapeake’s all-in acquisition cost of $1.68 per thousand cubic feet of equivalent,” the company said.

The deals specifically involve the acquisition of Tulsa-based Bravo Natural and substantially all the assets of Houston-based Legend Natural Gas and Oklahoma City-based Tilford Pinson Exploration, Chesapeake said.

Bravo’s assets consist of 20,000 acres located in the Granite Wash- producing Stiles Ranch and Allison Britt fields of the Anadarko Basin in Wheeler and Hemphill counties, Texas, and Roger Mills County, Okla. The Granite Wash, together with the deeper Cherokee/Atoka Washes, to date has produced more than 1.2 trillion cubic feet of gas equivalent from 10 major fields in the Anadarko Basin. The transaction is expected to close on August 2.

Legend’s producing assets and 18,000 net acres of leasehold are located in the Roleta, Haynes, Comitas and En Seguido fields in the Zapata County portion of South Texas. The majority of Legend’s assets are located three to seven miles south and east of the Zapata County assets Chesapeake acquired in October 2003 from Laredo Energy. The transaction is expected to close on August 31.

Tilford Pinson’s producing assets and 12,000 net acres of leasehold are located primarily in the Arkoma Basin fields of Northwest Scipio, Northwest Reams and South Pine Hollow in Pittsburg County, Oklahoma. The deal already has been closed.

Chesapeake said it intends to finance the $590 million of new acquisitions using a 50-50 combination of senior notes and common stock issuance.

Chesapeake’s average daily production rate for the 2004 second quarter was 951 million cubic feet of natural gas equivalent production, consisting of 841 million cubic feet of gas and 18,385 barrels of oil and natural gas liquids. It was Chesapeake’s 12th consecutive quarter of production growth.

During the 2004 second quarter, Chesapeake generated net income of $85.8 million or 31 cents per share on revenue of $574.3 million, up from net income of $76.3 million or 31 cents per share on revenue of $429.6 million in the second quarter of 2003.

When excluding a $7.1 million loss from the company’s hedging program, Chesapeake’s net income in the 2004 second quarter would have been $92.9 million or 33 cents per share, the company said.