Chesapeake Finalizes Utica Share Deal
Chesapeake announced the closing of the sale of $750 million of perpetual preferred shares in its wholly owned, unrestricted subsidiary, CHK Utica, L.L.C. The subsidiary owns approximately 700,000 net leasehold acres within an area of mutual interest in the Utica Shale play in 13 counties primarily in eastern Ohio (the CHKU AMI). Chesapeake has retained all the common interests in CHK Utica.
This closing completes a financial transaction led by EIG Global Energy Partners (EIG) and results in total proceeds of $1.25 billion of sales of CHK Utica preferred shares. As previously announced on November 3, 2011, EIG purchased $500 million of perpetual preferred shares in CHK Utica. The additional $750 million of preferred shares have been placed with: a co-investment vehicle managed by EIG consisting of limited partners and qualified EIG employees; GSO Capital Partners LP, an affiliate of the Blackstone Group; and Magnetar Capital, a private asset management firm.
The CHK Utica preferred shares issued in the second closing have identical terms to the initial shares sold to EIG, including an initial annual distribution of 7 percent, payable quarterly. Chesapeake has retained an option exercisable prior to October 31, 2018 to repurchase the preferred shares for cash in whole or in part at any time at a valuation expected to equal the greater of a 10 percent internal rate of return or a return on investment of 1.4x. Investors in the combined $1.25 billion of CHK Utica preferred shares will also proportionately receive a 3 percent overriding royalty interest in the first 1,500 net wells drilled on CHK Utica's leasehold, which is the equivalent of an approximate 0.45 percent overriding royalty interest across Chesapeake's projected 10,000 inventory of net wells to be drilled. Chesapeake's average net revenue interest on its Utica Shale leasehold is approximately 83 percent, which compares favorably to net revenue interests in the Haynesville, Barnett and Eagle Ford shale plays of approximately 75 percent.
As previously announced, part of this financial transaction includes a commitment by Chesapeake to drill a minimum of 50 net wells per year through 2016 in the CHKU AMI, up to a minimum cumulative total of 250 net wells, for the benefit of CHK Utica. Chesapeake believes it will have considerable operating and financial flexibility in fulfilling the drilling commitment because the company's planned Utica Shale drilling program for the years ahead involves a significantly higher rig count than the approximate 10-rig drilling program required by the terms of the CHK Utica preferred share investment. In addition, the company's pending Utica industry joint venture, if completed as proposed, will fund 60 percent of Chesapeake's share of drilling and completion costs, up to $1.5 billion in the joint venture area of mutual interest, which lies entirely within the CHKU AMI.
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