Tuesday, September 2, 2008

BP-Chesapeake Deal in Arkansas

A month and a half after Chesapeake sold all of its rights in the Woodford Shale to BP, it has inked a deal to sell a 25% interest in its Fayetteville Shale to BP for a total of $1.9 billion ($1.1 billion upfront, $800K for completion costs in 2008 and 2009) (Forbes article). This continues a string of deals by Chesapeake (remember huge Plains Exploration deal in the Haynesville Play?) that will likely continue until they sign a deal for their interest in the Marcellus Shale.

Chesapeake's strategy is hitting full stride. The company has decided to focus on the Barnett, Haynesville, Fayetteville and Marcellus Shales and the strategy is to get into the play fast and hard to tie up as much acreage as possible and then get a big player as a partner to provide additional funding and support to drill and produce on the properties. This strategy is necessary because Chesapeake has taken on a large amount of debt in its aggressive activities. I'm sure they'd rather go it alone than sell of a portion of their stake, but since the company has taken down so much land, it will require huge amounts of capital to do the drilling. Chesapeake doesn't have enough debt capacity, so they have to set up these joint ventures. It is rather ingenious because they are making a big profit on their early land deals and then share the burden of the risk for the capital-intensive drilling component.

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