Chesapeake Energy Corporation (NYSE:CHK) announced yesterday that it has entered into an agreement with RKI Exploration & Production, LLC (RKI) to exchange nonoperated interests in approximately 440,000 gross acres in the Powder River Basin (PRB) in southeastern Wyoming.
Under the agreement Chesapeake will convey to RKI approximately 137,000 net acres and its interest in 67 gross wells, with an average working interest of 22% in the northern portion of the PRB (“Northern Area”), where RKI is currently designated operator. In exchange RKI will convey to Chesapeake approximately 203,000 net acres and its interest in 186 gross wells, with an average working interest of 48% in the southern portion of the PRB (“Southern Area”), where CHK is currently designated operator.
In addition to the exchange of acreage, Chesapeake will pay RKI $450 million in cash. The transaction, which is subject to certain closing conditions including the receipt of third-party consents, is expected to close in August 2014.
Upon closing of the acreage exchange, Chesapeake’s PRB acreage will be concentrated in the Southern Area. It will operate nearly 100% of its 388,000 net acres in the PRB, and will hold an approximate 79% average working interest. Chesapeake currently holds approximately 322,000 net acres in the PRB with a 38% average working interest.
Anticipated key benefits of the RKI acreage exchange include the following:
- Increases Chesapeake’s PRB holdings by 66,000 net acres and average working interest from 38% to 79%;
- Consolidates Chesapeake’s position in the Southern Area, which offers multiple stacked oil pay zones with potentially recoverable gross resource estimated to be in excess of 2 billion barrels of oil equivalent (boe); and
- Adds net incremental production of approximately 4,500 boe per day.
Chesapeake’s recent PRB highlights include:
- In the Niobrara formation, Chesapeake has achieved a greater than 50% reduction in drilling cost per foot over the past two years. Coupled with planned longer laterals and completion improvements, single-well rate of return potential is targeted to exceed 40%, assuming a constant West Texas Intermediate (WTI) crude oil price of $90 per barrel and a Henry Hub natural gas price of $4 per thousand cubic feet (mcf);
- Chesapeake recently drilled a record 9,600-foot lateral Niobrara well in 32 days with a drilling cost of approximately $5 million, compared to 2013 vintage Niobrara wells with an average lateral length of 5,300 feet and average drilling cost of $6.6 million;
- The company’s initial Sussex formation test well (the “Sussex I”), which was placed on-line in January, 2014, has produced approximately 232,000 boe in 150 production days and continues to produce in excess of 1,500 boe per day;
- Chesapeake’s recent delineation well (the “Sussex III”), which is situated approximately 20 miles north of the Sussex I, produced at an initial 24-hour average rate in excess of 1,000 boe per day (approximately 85% oil) and substantially de-risks the northern end of the Sussex field estimated to be approximately 20 miles long by five miles wide; and
- The company estimates the Sussex formation offers single-well rate of return potential of greater than 50%, consisting of more than 75% oil with a favorable API gravity of 40 to 48 degrees.
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “We are excited to increase our position in this outstanding asset and consolidate our acreage, working interest and operatorship in the southern end of the Powder River Basin. Excellent results to date from the Niobrara and Sussex formations, coupled with additional stacked pay potential in other Upper Cretaceous sands as well as the Frontier and Mowry formations, demonstrate the potential of the Powder River Basin to be a major oil growth engine for the company.”
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