Exploration and production independent Chesapeake Energy is expanding its position in the hot Barnett Shale gas play of East Texas, agreeing to buy Hallwood Energy’s 18,000-acre North Block property in Johnson County for $277 million in cash.
The property is located immediately north of Hallwood’s 30,000-acre South Block property, in which Chesapeake acquired a 44 percent working interest through its $120 million acquisition of Canaan Energy in June 2002.
Back then Chesapeake said it assigned no value to Canaan’s Barnett Shale property, which it inherited in the deal.
“Today it appears that Chesapeake’s South Block Barnett Shale position may be worth more than what we paid for the entire Canaan transaction,” Aubrey McClendon, Chesapeake’s chief executive officer, said Nov. 30.
On Hallwood’s North Block, Chesapeake said it expects to acquire an estimated 135 billion cubic feet of natural gas equivalent proved reserves, 145 bcf of probable and possible reserves and net production of about 25 million cubic feet of natural gas equivalent production per day from 31 vertical wells and 11 horizontal wells.
Three-rig drilling program planned
Chesapeake said it has identified about 70 proved undeveloped and 90 probable and possible horizontal drilling locations on the 18,000 acre North Block, and that it believes each well can be drilled at an average cost of about $2.2 million to develop estimated ultimate reserves of 2.5 billion cubic feet per well.
Chesapeake said it is well positioned to continue Hallwood’s production ramp-up currently under way, having worked closely with Hallwood for two years in the South Block and because of Chesapeake’s extensive experience with horizontal drilling.
Including the Hallwood acquisition, Chesapeake’s total proved oil and natural gas reserves would increase to an estimated 4.6 trillion cubic feet of natural gas equivalent.
Through the use of a three-rig drilling program, Chesapeake said it could increase gas production on the acquired Hallwood property from 25 million cubic feet per day to at least 55 million cubic feet per day by December 2005 and to at least 85 million cubic feet per day by December 2006.
Chesapeake said it would cost about $303 million to fully develop the proved, probable and possible reserves on the North Block. As part of the deal, Chesapeake also agreed to purchase Hallwood’s North Block gas gathering, compression and water disposal assets for $15 million.
The North Block proved reserves are 100 percent gas, only 15 percent of which are proved developed.
“Over time, we are hopeful that our reserve estimates can increase and that our well spacing can decrease, leading to significantly higher recoverable proved reserves than currently projected,” McClendon said. “We believe we have been conservative in our reserve estimates for the acquired property.”
The acquisition, which is expected to close on Dec. 15, is to be financed using a portion of the proceeds from a new $600 million private issue of senior notes, Chesapeake said.
Oklahoma-based Chesapeake, which over the past five years invested $4.5 billion in acquisitions and $2.6 billion in drilling, posted an enviable 33 percent increase in total 2004 third-quarter production versus the same quarter last year.
Sixty percent of Chesapeake’s production growth in this year’s third quarter was attributed to acquisitions and 40 percent to the drill bit.
