Chesapeake Deals Norway's StatoilHydro into the Marcellus Shale

New Standard Set for Marcellus Shale Acreage

Well, Aubrey got 'er done. The long awaited joint venture in Chesapeake's Marcellus shale assets was announced this morning to my and most of the investment community's surprise. While the long term value of Chesapeake's acreage position was never really in question, its ability to do a deal under the current economic circumstances certainly was. Eventhough the proceeds are a little light of the last forecast, it's a good deal for Chesapeake. Fortunately, StatoilHydro took the long view and after a thorough analysis of the economics of the play, signed on for nearly $5,800 per acre at a time when Chesapeake and others are paying only $500-$2500.

Europe's #2 natural gas supplier, StatoilHydro, committed US$ 3.375 billion for 32.5% of Chesapeake's 1.8 million acre interest. $1.25B in cash will be paid at closing and $2.125B of drilling carry will be paid over the next four years to fund 75% of Chesapeake's drilling costs. The presentation from this morning's conference call shows that the company used mildly conservative economic assumptions in the decision: an average EUR per well of 3.1 bcf and drilling capex of $3.5 million per well. But, a rather aggressive drilling program over the next four years may prove an underestimated political risk. At $3,5 million per well, the drilling carry implies over 800 horizontal well completions during the next four years. Since the carry is a use it or lose it proposition, if Chesapeake is to use all of it, the number of wells would seemingly have to be even greater as drilling costs go down. The companies expect to ramp to an average of 40 operating rigs in 2012, so, at 10 wells per rig/yr, the plan is back end loaded. Also aggressive was the 87% net revenue interest assumption which seems to preclude the imposition of a severance tax in Pennsylvania.

Overall, StatoilHydro plans commit US$ 6.0B over the next four years including $ 2.63B to the joint venture for its 32.5% share of capex. This amount, as well as the drilling carry, will be somewhat variable as it is dependent on Chesapeake's completion performance, but it does imply that Chesapeake intends to spend US$ 8.0B of its own in project capex beyond its share of the drilling costs. Chesapeake plans to continue acquiring leasehold in the Marcellus Shale and StatoilHydro will have the right to a 32.5% participation in any such additional leasehold.

Press Release
StatoilHydro Presentation