Total SA Enters Barnett Shale Play in Joint Venture with Chesapeake Energy

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Researched by Industrial Info Resources (Sugar Land, Texas)--On January 4, Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) and Total E&P USA Incorporation (Houston, Texas), a subsidiary of Total SA (NYSE:TOT) (Paris, France), announced the formation of a joint venture partnership involving Chesapeake's Barnett Shale assets. The $2.25 billion deal was signed December 30, 2009, and is expected to achieve regulatory approval before the end of January.

Total will acquire 25% of Chesapeake's upstream Barnett Shale assets, the equivalent of approximately 175 million cubic feet of gas equivalent production per day. Total will pay an initial $800 million upon finalization the agreement, followed by an additional $1.45 billion by funding 60% of Chesapeake's drilling and well-completion projects in the Barnett Shale. Chesapeake expects to have received the $1.45 billion from Total by the end of 2012.

Despite the sale of the Barnett assets, Chesapeake has not lowered its 2010 production estimate of 2.65 billion cubic feet gas equivalent per day. In a conference call regarding the joint venture, Chesapeake CEO Aubrey McClendon commented on the agreement with Total and the production outlook for the new year. "The reason we can sell 175 million per day for $2.25 billion and not have to reduce our 2010 production forecast is a simple one: Our production levels continue to exceed what our budgets have been predicting, and so we are able to deliver this very attractive joint venture to our shareholders, yet not have to sacrifice any reported production growth to achieve it. Said another way, we will be collecting $800 million in upfront cash 30 days from now, and reducing our capex by another $1.45 billion over the next three years...yet still not reducing our previous production forecasts."

As part of the agreement, Total will acquire 25% of new leasehold acreage obtained by Chesapeake in the Barnett Shale through 2015. "This transaction marks a return to the onshore U.S. for Total, who had a meaningful onshore U.S. production presence in the 1980s and '90s," said McClendon. "Like most every big international energy company these days, Total is very keen to learn more about shale gas exploration and development and to earn the very attractive risk-adjusted returns that these world-class assets offer."

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