Chesapeake's Joint Venture Strategy Hooks Another Foreign Energy Company

Total has joined the growing list of major energy companies buying up unconventional natural gas assets. The French-based company will buy 25 percent interest in Chesapeake Energy's Barnett shale assets for $800 million in cash at closing. Total will pay an additional $1.45 billion by funding 60 percent of Chesapeake's share of drilling and completion expenditures. Under the terms of the joint venture, Total will acquire about 700 million cubic feet of natural gas equivalent per day of current net production and 3 trillion cubic feet of natural gas equivalent of proved reserves in the Texas gas field.

Granted, this deal is not as big as ExxonMobil's $31 billion all-stock purchas of independent unconventional natural gas and oil producer XTO Energy last month. But it's indicative of how interested domestic and foreign energy have become in North American shale gas. The deal also reflects a desire among unconventional gas producers -- like Chesapeake -- to spread out their risk and reduce its capital expenditures, all the while ramping up production.

And that's exactly what Chesapeake did, in this and three other deals completed in the past 18 months or so. CEO Aubrey McClendon made special note of it in a statement and in a call with investors earlier Monday. Chesapeake entered into similar joint ventures with BP, Plains Exploration & Production and Statoil. Each joint venture was for an interest in one of the four big shale plays -- Fayetteville, Haynesville, Marcellus and now the Barnett.

Proceeds from the four shale joint ventures amounts to about $10.8 billion, against a cost basis in the assets sold of $2.7 billion, McClendon said during the conference call. That's a return on investment of 300 percent or $8.1 billion, McClendon noted. Seventy percent of the proceeds have already been collected in cash.

At the same time, Chesapeake announced its production would remain the same in 2010 despite the offloading of Barnett shale assets. Projected production volumes for 2010 are unchanged because gains from the ongoing "outperformance" of its drilling programs is expected to offset the loss -- an initial 175 mmcfe per day -- from the Barnett sale to Total, Chesapeake stated in its SEC filing.

The Oklahoma-based also has increased its 2011 production forecast by about 2 percent or 50 mmcfe per day.

The Barnett joint venture with Total may just be the beginning of the relationship. Chesapeake has agreed to discuss a joint venture in its Eagle Ford shale as well as help Total evaluate Canadian shale plays, McClendon said during the conference call.