2009-02-02-2008-07-02-2008-07-02

Acquired 20% interest in 550,000 net acres in the Haynesville shale in northern LA.

Plains Exploration & Production Co., Houston, (NYSE: PXP) acquired a 20% interest in Haynesville shale leasehold in northern Louisiana and East Texas from Chesapeake Energy Corp., Oklahoma City, Okla., (NYSE: CHK) for $1.65 billion in cash and in addition has agreed to fund 50% of Chesapeake's 80% share of drilling and completion costs for future Haynesville joint-venture wells during a several-year period until an additional $1.65 billion has been paid for a total deal value of some $3.3 billion. Chesapeake estimates that its Haynesville leasehold as of June 30 was approximately 550,000 net acres. As a result of the transaction, Plains will hold approximately 110,000 net acres and Chesapeake will hold approximately 440,000 net acres. Chesapeake plans to continue acquiring leasehold in the Haynesville and Plains will have the right to a 20% participation in any additional leasehold. The companies currently plan to develop the Haynesville formation using 80-acre spacing, which could support drilling up to 6,875 horizontal wells on the leasehold. Assuming average per-well estimated ultimate recovery (EUR) between 4.5- and 8.5 billion cubic feet of equivalent, the companies report potential reserves of 23- to 44 trillion cubic feet of gas equivalent after deducting an assumed average royalty burden of 25%. Chesapeake currently has five operated rigs at work in the Haynesville play and anticipates operating at least 12 rigs there by year-end 2008, at least 30 by year-end 2009 and up to 60 by year-end 2010. Under this, the companies anticipate drilling at least 600 wells during the next three years. Aubrey K. McClendon, Chesapeake chief executive, says, "This transaction establishes a $16.5-billion valuation for our Haynesville shale leasehold, all of which is located in the core area of this very significant discovery. We believe it also provides an important validation of Chesapeake's strategy of being a 'first mover' in discovering and developing new unconventional-resource plays." McClendon says the $1.65 billion in cash and additional $1.65-billion commitment will help fund a substantial portion of its Haynesville leasing and drilling and completion costs during the next few years, resulting in finding costs from this play of less than $1 per thousand cubic feet equivalent. Standard & Poor's Ratings Service reports Plains' credit rating (BB/Stable/--) will not be affected by the deal. S&P expects measures to remain in line with expectations for the current BB rating and pro forma debt to EBITDAX (EBITDA plus exploration costs) to be 1.5x to 2x and debt per proved barrel of oil equivalent to be $5 to $6. Also, S&P does expect changes to Plains' unsecured and recovery ratings based on a higher net present value of oil and gas reserves and expectations that commitment levels under Plains' revolving credit facility will likely be reduced during the near to intermediate term. If commitment levels remain elevated for a protracted period of time or other material capital structure changes were to occur, unsecured issue ratings and recovery ratings could be subject to change. S&P has placed its ratings on Chesapeake on CreditWatch with positive implications. S&P credit analyst David Lundberg says, "The CreditWatch reflects our increased confidence that the company is managing the financial risks associated with its large capital program in a more prudent manner." This follows Chesapeake's planned stock offering, which is expected to raise approximately $1.5 billion. Lundberg says other factors include Chesapeake having raised $1 billion in an April offering; entered the joint venture with Plains; and the planned sale of Woodford shale assets to BP Plc. Chesapeake has a BB corporate credit rating with S&P, which Lundberg says the firm will likely affirm. He said S&P will likely resolve the CreditWatch within the next 60 days, and that the rating could be raised to BB+ if debt to EBITDA is in the mid-2x area and FFO to debt is above 30% when using S&P's hydrocarbon pricing assumptions.