Chesapeake Sells $750 Million in Shares of Utica Subsidiary

Chesapeake Energy Corp. (CHK), which agreed last month to sell part of its Utica Shale holdings, sold to a group of private investors $750 million worth of preferred shares in a subsidiary created to help fund development of the oil and natural-gas field.

The shares in CHK Utica LLC were sold to Magnetar Capital, Blackstone Group’s GSO Capital Partners LP, and an investment vehicle managed by EIG Global Energy Partners LP that comprises certain EIG employees and limited partners, according to a statement today. Chesapeake said on Nov. 3 it had sold $500 million in preferred shares in the subsidiary, which holds about 700,000 acres in the shale formation, to private-equity firm EIG Global Energy.

Chesapeake, based in Oklahoma City, owns drilling rights for a total of about 1.5 million net acres in the Utica, which stretches from Ohio to Canada. The formation may hold as much as 5.5 billion barrels of oil and 15.7 trillion cubic feet of gas in Ohio, according to the state’s Department of Natural Resources.

Preferred shareholders in CHK Utica will receive a 7 percent annual distribution and a 3 percent overriding royalty interest in the first 1,500 wells that Chesapeake drills on the subsidiary’s leases. Chesapeake has the option to repurchase the shares until 2018.

Chesapeake also announced on Nov. 3 it signed a letter of intent to sell 25 percent of 650,000 acres in the field it co- owns with Houston-based Enervest Ltd. The buyer, an unnamed international energy company, will pay Chesapeake $640 million in cash and about $1.5 billion in future drilling costs.

Switching to Oil

Investors are watching Chesapeake’s Utica investments closely because they are crucial to the company’s plans to switch its production from gas to oil and liquids, said Michael Bodino, head of energy research at Global Hunter Securities LLC in Fort Worth, Texas.

“To get the market more comfortable with the Utica, they’re going to have to put out more well results,” said Bodino, who rates Chesapeake’s shares a “buy” and owns none.

Chief Executive Officer Aubrey McClendon said at a Jefferies & Co. conference Nov. 30 he expects the joint venture to close and the buyer’s name to be disclosed by the end of the year.

McClendon declined to rule out Total SA as the unidentified partner at the conference. Reliance Industries Ltd. of India isn’t the partner, he said.

Chesapeake fell 1.1 percent to $25.15 at the close of trading in New York.

To contact the reporter on this story: Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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