Chesapeake Energy said on Thursday it plans to raise $3.4 billion by selling a share of its stake in the Utica Shale to an unidentified joint-venture partner and floating shares in a new entity that owns acreage in the field.
The Utica is believed to hold billions of barrels of oil and significant reserves of natural gas.
The announcement is the biggest signal so far of the vast potential of the Utica, which has seen some exploration by oil and gas companies but whose riches as a possible significant new domestic US energy source have yet to be tapped.
The joint venture between Chesapeake Energy, the world’s biggest shale-gas producer, and its undisclosed partner is seen as a strong endorsement of the value of the eastern Ohio field, and may spark a new rush to acquire acreage and develop the field.
“This is impressive,” said Michael Lynch, president of Strategic Energy and Economic Research, a consulting firm in Amherst, Mass. “It really provides an optimistic value on those shale reserves.
“This is the biggest vote of confidence so far in the Utica.”
Lynch said the Utica, which lies below the gas-rich Marcellus Shale in neighboring Pennsylvania and surrounding states, may contain as much as 100 billion barrels of oil in place, about 5 billion of which would be recoverable.
Although the recoverable estimate is lower than that of 13 billion at Prudhoe Bay – the biggest US oil field – the Alaskan field has an oil-in-place estimate of just 40 billion barrels, indicating a much lower potential than the Utica.
Chesapeake said it will net $2.14 billion by selling 25% of its portion of 650,000 acres of leasehold in the wet natural gas area of the Utica. Of the total area, 80,000 acres are owned by Houston-based Enervest Ltd., and its affiliates.
Land, Lease Prices Soar
In another sign of the Utica’s potential, the JV transaction values the land at $15,000 per net acre, sharply higher than most other shale acreage.
“Either the buyer knows something we don’t or they have an extremely optimistic view of long-term oil prices,” said Lynch, who said shale leases are more likely to be valued at $5,000-$8,000 an acre.
Chesapeake chief executive Aubrey McClendon said the joint venture allows the company to recover more than its total investment in the Utica while selling only 142,000 of its 1.5 million acres in the Utica leasehold.
“We have achieved very strong initial drilling results in the wet natural gas and dry natural gas areas of our Utica Shale play and are beginning to accelerate our evaluation of the oil area of the play,” McClendon said in a statement.
Chesapeake said it signed a letter of intent with the joint-venture partner under which Chesapeake will be the operator of the field, conducting all leasing, drilling, completion and marketing. The partner will have options to acquire a 25% share of all additional acreage acquired by Chesapeake, and to take a 25% interest in mid-stream infrastructure.
The company also said it has completed the sale of $500 million in shares of the newly formed CHK Utica LLC to EIG Global Energy Partners. The new entity is a wholly owned subsidiary of Chesapeake which owns some 700,000 acres in 13 eastern Ohio counties. The company also plans to sell another $750 million in preferred shares of the new entity to other investors.