Friday, November 14, 2008

Chesapeake Enters JV Deal for Marcellus Shale

After much discussion, Chesapeake Energy has signed a big joint venture deal with StatoilHydro ASA, the Norwegian state owned oil company, to develop Chesapeake's interests in the Marcellus Shale (press release). Under the agreement, Statoil will pay Chesapeake $1.25 billion in cash upfront and fund 75% of Chesapeake's Marcellus drilling costs up to an additional $2.13 billion. Based on the all-in numbers, the Wall Street Journal estimates the deal to be valued at approximately $5,600 per acre. Others peg the value at $5,800 to $6,000 per acre. Given the fact that lease bonuses in the Marcellus region never approached those in the Haynesville or Barnett Shales, it appears to be a very good deal for Chesapeake.

The deal brings up a few very interesting points:

First, the valuation of the deal is a bright light in an otherwise dour natural gas market. Since July, prices have plummeted by approximately 50%, and the gas price chart looks more like a cliff face than the side of a hill. Additionally, with the troubles in the credit markets, financing is increasingly difficult to find, and companies with lots of debt (like the independent E&Ps) are starting to look over-leveraged and risky. Stock prices have clearly reflected this, as some independent E&P's have seen 65% to 80% decreases in stock prices, far outpacing the decline in natural gas prices. Thre is definitely a feeling of panic out there. I view the Chesapeake deal as something that will calm the proverbial waters and allow the ships at sea to regain their bearings.

Second, some analysts believe (as I do) that the fundamentals of the natural gas market will support a higher price of gas. The pricing of the Statoil/Chesapeake deal seems to reflect this.

Third, with declining opportunities in many other parts of the world, either because of political instability or physically declining fields, many of the larger international players are looking to buy into US gas reserves. The US is a politically stable environment, and they view natural gas as a good future fuel for the US because it is clean and relatively abundant. BP has already struck two deals with Chesapeake for its Woodfork and Fayetteville Shale assets. Shell has partnered with EnCana in the Haynesville Shale, and Norwegian company Norse Energy already owns around 175,000 acres in the Marcellus Shale (see article). To me this is another positive because increased foreign investment will help fund and expedite the capital intensive development of the Hayenesville Shale and other shale fields.

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