Tuesday, June 9, 2009

Chesapeake-Indigo Deal: Divergent Strategies

Indigo Minerals, LLC has announced the purchase of certain conventional gas assets from Chesapeake Energy in North Louisiana, Arkansas and East Texas for $218 million. The acquisition includes 519 producing wells (219 operated/300 non-operated) in 60 fields representing approximately 82,000 acres as well as 40,000 acres of undeveloped land. As part of the deal, Chesapeake retained drilling rights to the deep (Haynesville Shale) wells. This deal has been in the works for a while and is scheduled to close June 30, 2009.

This is an interesting transaction that should be a win-win for both parties. Indigo acquired “conventional” assets, leaving Chesapeake with the “unconventional” assets. This plays into Chesapeake’s strategy of The Big Play. The company invests heavily in unconventional resources with the belief that big risk equals big payoff. In the short life of the Haynesville Shale, Chesapeake has become its poster child by acting boldly, which has poised the company to reap significant rewards. Conventional fields just don’t play to that big risk, big reward strategy.

Indigo, on the other hand, is a well capitalized and newly formed independent. The firm was organized in 2006 by Yorktown Partners, the Martin Companies (a Louisiana timber family), Bank of America Capital Investments and the company’s management. Last year, the company sold Haynesville Shale land to EnCana and netted $457 million, so it was sitting on a pile of money. By selling Haynesville land during the land rush, it made a premium on its land and is now reinvesting in good (but not sexy) revenue producing properties. Capex is lower but returns are predictable and steady, all effectively bought at a discount.

Each company has a different strategy that will likely work for each. Chesapeake often talks about the shale “haves” and “have nots.” It tends to disparage the “have nots,” but I think not being part of the shale rush can still be a good strategy if done right.

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