Chesapeake Gasses Up Yet Again
By Stephen D. Simpson, CFA (TMFWildWeasel)
January 18, 2006
It looks like the empire-building at Chesapeake Energy (NYSE: CHK) goes on. Apparently not content to merely be among the largest natural gas companies in the United States (in terms of domestic reserves), the company has once again purchased more energy-producing assets.
This most recent deal is actually a collection of deals. When all is said and done, the company will pay $796 million in cash to seven private companies for a variety of assets in Texas. These properties lie in well-known energy-producing areas like the Barnett Shale, the Permian Basin, and the Mid-Continent, and constitute 264 billion cubic feet in proved reserves of natural gas equivalent and perhaps as much as 660 billion cubic feet in total.
Following the company's typical modus operandi, management has already hedged the vast majority of current production from these assets -- hedging 70%, 100%, and 100% of production for 2006, 2007, and 2008, respectively, at prices ranging from $9.23 to $9.85.
If you play along with the company's allocation of the purchase price, it is spending less than $12 per barrel of oil equivalent (one barrel of oil equals 6,000 cubic feet of gas) -- less than it paid back in October for the Columbia Natural Resources deal. That said, including the cost to develop the properties bumps the total tag to $2.58 per mcfe or about $15.50 per barrel of oil equivalent -- still a fine price given prevailing market conditions.
Chesapeake didn't stop there, though. The company also purchased 13 drilling rigs for a total of $150 million. This company is somewhat unusual in that it owns its own rigs (as opposed to contracting with the likes of Nabors (NYSE: NBR) or other land drillers), so this deal will help exploit these newly acquired Texas assets.
For those wondering where the money is coming from, the company plans to tap its bank credit facility and issue debt and/or equity at some point in 2006.
It would seem pretty clear to me that management here is full of confidence -- not only is the company aggressively expanding its reserve base, but insiders continue to buy shares. That's an interesting contrast to the likes of Apache (NYSE: APA) or the giant ExxonMobil (NYSE: XOM), where there has been less activity in terms of both new production assets and insider purchases. Only time will tell if that confidence is well placed.
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