With just four wells reported—and 12 more in various stages of drilling and completion—from its 1.5 million net acres over the Utica play, Chesapeake Energy Corp. has flipped its $1.5- to $2 billion in leasing cost into $3.4 billion in cash and drilling carries.

The deal monetizes the equivalent of 142,500 net acres of its Utica leasehold for $15,000 an acre in a joint venture—its seventh in a U.S. shale play—and 3% of its overriding royalty interest in a combined capital-shot-with-a-chaser arrangement. The Utica has oil, dry- and wet-gas windows, trending from west to east.

In the past 10 years, Chesapeake has now acquired 5.1 million net acres over the seven U.S. unconventional-resource plays in which it has brought in a JV partner—the Haynesville, Barnett, Eagle Ford, Fayetteville, Woodford, Marcellus and Utica—for some $11.1 billion, or about $2,200 per net acre. It has sold the equivalent of 1.5 million net acres for $16.4 billion in cash and carries.

Aubrey McClendon, chairman and chief executive officer, says, “…Meaning we recovered 150% of our total leasehold costs…, while leaving ourselves with 3.6 million net acres in seven of the nation’s very best plays at a negative leasehold cost of $5.3 billion. That’s about a negative $1,500 per net acre.

“I really don’t think the magnitude or significance of what we have accomplished by owning 3.6 million net acres at a profit of $1,500 per net acre has been fully appreciated. It is quite simply unprecedented in our industry.”

In the Utica deal, it is raising $640 million in cash from a to-be-named JV partner and $500 million from a financial partner, EIG Global Energy Partners.

It expects to raise another $750 million from selling perpetual preferred shares that come with a 3% overriding royalty interest and minimum 7% annual dividend in CHK Utica LLC to additional financial partners and $1.5 billion from the JV partner’s drilling-carry commitments.

Chesapeake may roll out three additional JVs in 2012, these involving its 400,000 net acres in the oily Bakken/Three Forks play in the Williston Basin, 1.4 million net in the oil and gas-liquids Mississippi Lime play in the northern Anadarko Basin and some 500,000 net in a new, oily play.

McClendon wouldn’t reveal yet the location of the new play but he does mention that it is onshore the U.S. and not in California or over the nascent Tuscaloosa Marine shale play in central Louisiana. It also isn’t over the Woodbine play—which interrupts the Eagle Ford between South Texas and central Louisiana—in East Texas, where Chesapeake is drilling but where 500,000 net acres aren’t available for on-the-ground leasing.

It also isn’t considering JVs in its Permian and western Anadarko Basin acreage, where McClendon says its sunk cost in leasehold is not so large that it needs to be derisked in a hurry.

It has, however, sold minority interest in some of its western Anadarko Basin leasehold over the Granite Wash gas-liquids play in a royalty trust IPO that raised $380 million at press time. And, it may do a JV in the oily window of the Utica as it continues to work that phase of the play.

Otherwise, it is winding down its spending on leasing by as much as half. “I think the industry is running out of places where you could put together big leasehold positions,” McClendon says.

He believes the Utica will be the most profitable play in the U.S. By early November, Chesapeake had spudded 19 horizontals with seven in sales already. Sometime after year-end, he expects to release more details on its well results there.

For now, the company is still adding to its position at the rate of 1,000 acres a day, and prices doubled after it revealed results from just four Utica wells in late September.

He concludes, “We just announced a deal where we’re going to make 10:1 on our money in less than a year. And I’m a little surprised people don’t ask us why we don’t spend more on leasehold. It’s clearly a huge area of profit for us, and it is unique in the industry.

“…When you look back on this five years from now, 10 years from now, companies are going to say, ‘Wow, I wish I had negative $1,500 an acre in my cost pool for the great acreage like Chesapeake has.’”

For more details on the Utica and other M&A deals, see A-Dcenter.com.

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