Thursday, August 6, 2009

Chesapeake and Plains Change JV Agreement

Chesapeake Energy announced today that the company and Plains Exploration had agreed to change their joint venture agreement for the Haynesville Shale. On the surface, it looks like Plains will pay Chesapeake upfront instead of over time for Chesapeake's share of drilling costs it would have received over three years. The total payment will be discounted by a total of about 12%, presumably to take into consideration the time value of money. Once the deal is formalized in September, each party will be responsible for its own share of future drilling costs. It looks like the deal also firms up the ownership percentages, as Plains' option to convey 50% of its share to Chesapeake in 2010 was cancelled.

I'm not sure of the motivation behind this amendment, but I was always taught that it's better to get your money upfront. While it does put money in Chesapeake's pocket, the agreement requires the company to write bigger checks for its share of production costs.

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