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Chesapeake sells Utica stake to Total

by Laura Board | Published January 3, 2012 at 11:52 AM

Chesapeake Energy Corp. said Tuesday, Jan. 3, it sold a 25% stake in Ohio's Utica shale formation to France's Total SA for $2.32 billion.

The transaction follows a November announcement of a deal with a then-undisclosed international oil producer and continues an M&A bonanza in the U.S. shale sector, which accounted for more than half of all oil and gas dealmaking in the third quarter.

The sale creates a joint venture covering 619,000 net acres in eastern Ohio. Alongside Chesapeake, the other selling shareholder was Houston-based EnerVest Ltd., which received $290 million of cash proceeds. Chesapeake said it received $610 million in cash at closing Friday and will receive a further $1.42 billion by the end of 2014 as compensation for the cost of developing the formation. Total put its share of future capital expenditure at as much as $1.63 billion over up to seven years.

If the venture acquires further acreage, Total will participate in order to maintain a 25% stake in the overall project, said Chesapeake, which will operate the joint venture.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. wrote in a Tuesday note that Total paid a reasonably full price for the properties -- $12,000 per acre discounted for future net cash flows, or $15,000 per acre undiscounted. They base their calculation on average acreage in the area and 75% of their value for Eagle Ford acreage in South Texas by comparison.

The transaction continues a program of divestments at Oklahoma City-based Chesapeake stretching back three years. Chesapeake has told investors to expect a further $7 billion worth of asset sales and joint ventures this year as part of its plan to cut debt of about $11.8 billion at the end of the third quarter.

CEO Aubrey McClendon said in a statement that the deal with Total, already a partner in the Barnett Shale in North Texas, is Chesapeake's seventh significant joint venture. Chesapeake has sold acreage worth $14.8 billion through those joint ventures, he added.

Global Hunter Securities LLC analyst Mike Kelly calculated a residual value of $45.7 billion on the remaining acreage. "2012 will likely mark another year filled with such asset monetization, given management's track record of delivering on getting these deals done," he wrote. "We're less inclined to be worried about the shortfall between operating cash flow and [capital expenditures] that will be present this year."

Total Exploration & Production USA Inc. president Yves-Louis Darricarrère said the purchase "is consistent with our strategy to develop positions in unconventional plays with large potential and, in this case, with value predominantly linked to oil price."

"This JV will provide us with a material position in a valuable long-term resource base under attractive terms and with a top-class operator," he added in the statement.

The structure of the deal is similar to the two companies' January 2010 deal for the Barnett Shale, in which Total paid $800 million cash and pledged to invest a further $1.45 billion over up to six years in exchange for a 25% stake.

Total spokesman Florent Segura said the company is "always on the lookout for potential opportunities in the nonconventional gas sector" but declined to comment on future targets.

Total is one of a growing number of international investors in North American shale assets.

These also include Anglo-Australian mining group BHP Billiton Ltd., which last year bought Chesapeake's Fayetteville Shale gas assets in Arkansas for $4.75 billion in cash; and Japan's Itochu Corp., which in December participated in the $7.2 billion buyout of Samson Investment Co. with Kohlberg Kravis Roberts & Co. LP, Natural Gas Partners and Crestview Partners.

Another Japanese investor, Mitsui & Co. Ltd., was originally thought to be Chesapeake's mystery partner in Utica, having bought stakes in properties in South Texas' Eagle Ford Shale from SM Energy Co. in June for $750 million and in the Pennsylvania portion of the Marcellus Shale from Anadarko Petroleum Corp. in 2010 for $1.4 billion.

Jefferies & Co. advised Chesapeake. Segura declined to identify Total's advisers.

-- Claire Poole contributed to this report.

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