Chesapeake Total Partnership

Chesapeake and Total Team Up in Utica Shale

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Chesapeake has been doing some major projects down in the Utica Shale area. This has been known for some time, however, their partnership with Total has been a bit more discrete. How exactly are they teaming up together? Great question! Christopher Helman explains how they have been working together.

According to the terms of the deal, Total has already paid $700 million in cash and has promised to put up $1.63 billion over 7 years to carry 60% of capes on drilling wells. The JV, which also includes private equity group EnerVest, covers 619,000 acres. Total gets 155,000 acres net, and also has the option to acquire a 25% share in all future acreage acquired in the liquids-rich section of the Utica shale.

The price Total paid, coming to roughly $15,000 an acre including the promised carries (or $12,000 an acre, discounting the present value of those future cash payments), seems reasonable considering that acreage in the liquids-rich Eagle Ford shale of south Texas changed hands last year at $25,000. The Utica is not as proven as the Eagle Ford. As explained in our last post on the topic, Total did manage to squeeze Chesapeake for a discount on cash it had pledged for drilling on a JV in the Barnett shale. Total still had $471 million out of $1.1 billion left to pay out on Barnett drilling, but Chesapeake announced that it would give the French a 9% haircut on the rest of the carry in exchange for a lump sum payment (recorded in the third quarter) of $429 million. Looks like a good deal for Chesapeake, which is habitually short on cash and has piled on $2.6 billion in debt this year despite promising to cut leverage. It was probably a good deal for Total also, considering that low natural gas prices have made drilling in the Barnett barely economic. Like the Barnett, Marcellus, Eagle Ford, and 90% of all other drilling in the U.S. today, the Utica fields will be developed using hydraulic fracking.

CHK

TOT

Hopefully, this give some explanation as to how these two companies have teamed up in the shale business. Now that the partnerships is public, let’s see how this effects their stock!

Quotes taken from report by Christopher Helman, Read the entire article here.

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