Chesapeake Strikes Deal with Driller in A Bind

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Feb. 13, 2009

Parallel Petroleum Corp. will turn over half its interest in a natural-gas field rather than pay to drill wells, in perhaps the starkest sign yet of how tumbling oil and gas prices have left small energy producers desperate for cash.

"This is the first fire-sale of assets we've seen," said David Heikknen, an analyst with Tudor Pickering Holt & Co. in Houston.

Under the deal, Parallel will give Chesapeake Energy Corp. half its 35% interest in a 25,600-acre gas field in Fort Worth, Texas. Chesapeake already owned most of the remaining 65%.

Parallel, of Midland, Texas, won't get any cash in the deal. But it will get out of paying about $51.5 million to cover its share of the cost of drilling wells on the land this year.

For the first eight years of the deal, Chesapeake will pay the full cost of drilling the wells and own all the gas produced until it has recovered Parallel's share of the cost, plus 50%.

Parallel Chief Executive Larry Oldham said his company has been hit by the collapse in oil and gas prices and needed to slash spending.

"We're just going to hunker down," Mr. Oldham said.

In its fields in West Texas and New Mexico, Parallel can control its spending because it decides how many wells to drill and when. But in Fort Worth, Parallel was having to pay its share of whatever wells Chesapeake decides to drill.

Chesapeake Chief Executive Aubrey McClendon said he received an email from Mr. Oldham about a month ago saying he needed to cut spending and proposing a deal. "They needed a solution and we saw it as an opportunity to make some money," Mr. McClendon said.

Just months ago, Chesapeake itself was seen by many analysts as being in danger of collapse. But the company cut spending while raising billions of dollars in a series of asset sales, and in recent weeks it has also been able to raise more than $1.4 billion in long-term debt. Analysts say Chesapeake now has the flexibility to take advantage of opportunities as its smaller competitors struggle.

"Chesapeake still has deep pockets," said Dan McSpirit, an analyst with BMO Capital Markets in Denver.  

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