This excerpt taken from the CHK 8-K filed Oct 4, 2005.
COLUMBIA NATURAL RESOURCES, LLC FOR $2.2 BILLION IN CASH
Company Will Acquire Production of 125 Mmcfe Per Day and Internally Estimated Reserves of 2.5 Tcfe, Consisting of 1.1 Tcfe of Proved Reserves and
1.4 Tcfe of Probable and Possible Reserves
Columbia Is the Fourth Largest Natural Gas Producer in the Appalachian Basin and Largest Leaseholder, Owning 4.1 Million Net Acres on Which
Chesapeake Has Identified 9,435 Drilling Locations
Pro Forma for the Transaction, Chesapeakes Projected December 2005 Production Rate Increases to 1,460 Mmcfe Per Day, Proved Reserves
Reach 7.1 Tcfe, Proved and Unproved Reserves Reach 13.5 Tcfe and
Leasehold Inventory Doubles to 8.2 Million Net Acres
OKLAHOMA CITY, OKLAHOMA, OCTOBER 3, 2005 Chesapeake Energy Corporation (CHK:NYSE) today announced that it has entered into an agreement to acquire Columbia Natural Resources, LLC and certain affiliated entities (CNR) from Triana Energy Holdings LLC (Triana) for $2.2 billion in cash, the assumption of an estimated $75 million working capital deficit and liabilities related to CNRs prepaid sales agreement and hedging positions.
Through this transaction, Chesapeake anticipates acquiring an internally estimated 2.5 trillion cubic feet of natural gas equivalent (tcfe) of proved, probable and possible (3P) reserves, comprised of 1.1 tcfe of proved reserves and 1.4 tcfe of probable and possible reserves. The sellers independent third party engineering report calculated CNRs 3P reserves to be 3.9 tcfe, or 56%
more 3P reserves than Chesapeake will initially recognize. CNRs current daily net production is approximately 125 million cubic feet of natural gas equivalent (mmcfe), indicating a proved reserves-to-production index of 23.0 years and a proved developed reserves-to-production index of 16.0 years. The properties are principally located in West Virginia, Kentucky, Ohio, Pennsylvania and New York.
After the preliminary allocation of $175 million of the $2.2 billion purchase price (which excludes negative working capital and liabilities associated with the assumed prepaid sales agreement and hedges) to CNRs extensive mid-stream natural gas assets being acquired (including over 6,500 miles of natural gas gathering lines) and $500 million to the unevaluated portion of the 4.1 million net leasehold acres being acquired (3.5 million net acres in the U.S. and 0.6 million net acres in Canada), Chesapeakes acquisition cost for the 1.1 tcfe of internally estimated proved reserves will be approximately $1.45 per thousand cubic feet of natural gas equivalent (mcfe). Based on the companys projected development plan, which includes approximately $4.1 billion of anticipated future drilling and development costs, Chesapeake estimates that its all-in cost of acquiring and developing the 2.5 tcfe of 3P reserves will be approximately $2.48 per mcfe, exclusive of the negative working capital and prepaid sales and hedging liabilities to be assumed.
CNRs proved reserves are long-lived, have low production decline rates (the proved developed producing base is projected to decline at less than 10% per year), are 99% natural gas, have an average BTU content of 1,140, are 70% proved developed and have estimated lease operating expenses of $1.35 per mcfe. In addition, gas sold from the properties generally receives a $0.50 per mmbtu premium to NYMEX gas prices, compared to basis differential discounts that currently range up to $4.00 per mmbtu in various southwestern and western U.S. natural gas supply basins. Adjusting further for the favorable BTU content, CNRs natural gas today receives wellhead prices of up to $5.00 per mcfe more than typical southwestern and western U.S. natural gas production.
On the acquired properties, Chesapeake has identified 1,316 proved undeveloped (PUD) locations, 6,286 probable locations and 1,833 possible locations for a total of 9,435 undrilled locations, or an estimated drilling inventory of more than 15 years. By comparison, the sellers independent reservoir engineers identified 1,611 PUD locations (22% more than Chesapeake will initially recognize) and over 14,000 probable and possible locations (72% more than Chesapeake will initially recognize).
As of June 30, 2005 and pro forma for this acquisition, Chesapeake will own an internally estimated 13.5 tcfe of proved and unproved oil and natural gas reserves, comprised of 7.1 tcfe of proved reserves (which will be 92% natural gas and 100% onshore) and 6.4 tcfe of unproved reserves. The company intends to spend at least $200 million per year for the foreseeable future in further developing the acquired properties and is budgeting production growth from the acquired assets of 5-10% per year.
Chesapeake has begun the process of hedging the production it will acquire from CNR. The company intends to hedge at least 50% of CNRs estimated base production through December 2008. The prices received from such hedging should significantly exceed the pricing assumptions used by Chesapeake to value the properties.
As part of the transaction, the company will assume CNRs prepaid sales agreement and its hedging arrangements. Chesapeake expects to record any potential mark-to-market loss on those obligations as a balance sheet liability when the transaction closes. The amount of the mark-to-market loss will be dependent on gas prices on the day of closing. For example, using a flat $7.00 NYMEX gas strip through December 2009, the prepaid sales and hedging liabilities would be approximately $325 million. Using gas prices as of September 30, 2005, the prepaid sales and hedging liabilities would be approximately $775 million.
Chesapeake will soon file its Hart-Scott-Rodino (HSR) pre-merger notification form with the Federal Trade Commission. Satisfaction of the HSR requirements should occur within 30 days after filing. Accordingly, the company anticipates closing the transaction no later than December 15, 2005. The company intends to finance the acquisition from cash on hand and by issuing a balanced combination of senior notes and equity securities. As a result of this acquisition and the contemplated financings, the company has attached its updated Outlook as Exhibit A to this release. The companys previous Outlook, dated September 7, 2005, is attached as Exhibit B for comparative purposes.
Triana was formed in 2001 by management and executives of Metalmark Capital LLC as a Morgan Stanley Capital Partners portfolio company. Triana was advised in this transaction by Morgan Stanley & Co. Incorporated and Credit Suisse First Boston LLC.