Chesapeake Energy Corp., Oklahoma City, (NYSE: CHK) plans to acquire a 50% interest in a joint-venture agreement with Ontario-based Epsilon Energy Ltd. (Toronto: EPS) to develop its Marcellus shale holdings for a total deal value of $100 million. Chesapeake will pay $5 million in cash up front and carry the first $95 million of Epsilon’s 50% share of leasehold, drilling, completing, equipping and gathering costs.

The joint venture involves 11,500 net acres (5,250 net to Chesapeake) in Epsilon’s Highway 706 prospect in Susquehanna County, Penn. Current total production is approximately 10 million cu. ft. of gas per day. Epsilon believes some 120 to 150 additional net drilling locations exist (60 to 75 net to Epsilon).

Epsilon executive chairman, president and chief executive Zoran Arandjelovic says, “This transaction will allow Epsilon to reduce its future capital expenditures and further position us to improve our exploration and development costs and returns on capital for years to come as well as develop our expertise in unconventional hydrocarbons.“

He adds that the proposed venture will allow the company “to invest in the development of its other North American properties including other Marcellus shale assets in New York, Bakken oil assets in Saskatchewan and Utica shale assets in Quebec.”

Aubrey K. McClendon, Chesapeake chief executive, says, “We are very pleased to have been selected by Epsilon to lead the development of its Highway 706 prospect. Epsilon’s acreage is located in an area of Susquehanna County where we expect average estimated ultimate reserve recoveries to be substantially greater than those found on average in the Marcellus.”

The carry obligation is expected to be completed within 30 months after the expected closing date of Feb. 1. Clarus Securities Inc. is financial advisor to Epsilon. GMP Securities LP and Cormark Securities Inc. will provide independent strategic advice to Epsilon.

Pritchard Capital Partners LLC analyst Ray Deacon says the implied transaction price, assuming $50 million of value for net production of 5 million cu. ft. per day, is $8,072 an acre.

Comments