Monday, May 25, 2009

Chesapeake at it Again

No, not killing cows; monetizing its natural gas assets. While it's no surprise given the company's track record and earlier statements, Chesapeake has indicated that it is close to a deal for a volumetric production payment ("VPP") in the neighborhood of $500 million for its Barnett Shale assets. Chesapeake is silent on the potential partner until the deal closes.

This is a different kind of arrangement than the deal Chesapeake struck with Plains Exploration in the Haynesville Shale. With a VPP, a partner pays a fixed price for a certain quantity of product. The deals with Plains in the Haynesville Shale and StatoilHydro in the Marcellus Shale are joint ventures designed for the partner to front drilling costs for a share of the future cash flow. Because the Barnett Shale is a more mature field and Chesapeake has approximately 1,350 producing wells there, the company was able to leverage its past risk to raise outside capital.

Chesapeake has also indicated that it intends to put about $1 billion worth of midstream assets into a joint venture to raise approximately $550 million. Again, not new news, but the company seems to have made some progress towards a deal, which had been tabled as of late last year.

Chesapeake has proven to be a pro at using unconventional methods to raise cash. You can bet that when the recession starts to clear and gas prices start to creep back up Chesapeake is going to attack the Haynesville Play with a cash-fueled fury.

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