McClendon Raises $1.7 Billion for Utica Acquisitions

Aubrey McClendon, who built Chesapeake Energy Corp. into the second-largest U.S. natural gas producer before his ouster in April, raised about $1.7 billion from private-equity firms to explore an Ohio formation he once projected would be among the richest U.S. shale deposits.

McClendon plans to lease 110,000 acres in the Utica Shale and begin drilling by year-end, his new Oklahoma City-based company, American Energy Partners LP, said in a statement today. Arrangements are already in place to gather and process natural gas and byproducts from wells.

Backers of the plan include Energy & Minerals Group, the lead equity investor, and First Reserve Corp., the largest energy-focused buyout firm, American Energy said. Blackstone Group LP’s GSO Capital Partners is the lead debt provider, and other investment will come from BlackRock Inc., Magnetar Capital LLC and American Energy management.

McClendon, 54, left Chesapeake after questions were raised about his personal borrowing from some of the company’s biggest financiers and activist investors, including billionaire Carl Icahn, criticized him for reckless management. As chairman and chief executive officer, McClendon led Chesapeake’s foray into the Utica, where it’s the largest operator.

Outdrilling Chesapeake

Drilling in the Utica deposit has more than tripled in the past year as explorers sought to harvest gas with high concentrations of valuable byproducts such as propane and ethane, according to data compiled by Bloomberg Industries.

McClendon, who co-founded Chesapeake in 1989, may outdrill his former employer by putting as many as 12 rigs to work in the formation in the next two to three years. Chesapeake has nine rigs in the Utica, according to an Oct. 2 presentation published on the company’s website.

Steven Lipin, an American Energy spokesman employed by Brunswick Group Inc., had no immediate comment beyond the press release.

Chesapeake announced a “major new liquids-rich play” in the Utica two years ago, saying the 1.25 million acres it had amassed in the formation may be worth as much as $20 billion, almost equivalent to the company’s market valuation at the time.

The Utica “is likely most analogous, but economically superior to, the Eagle Ford Shale” in Texas, Chesapeake said on July 28, 2011. The Eagle Ford is the largest U.S. shale deposit after the Marcellus in Pennsylvania, according to Investment Technology Group Inc. of Calgary. The Utica ranks third.

Utica Hype

The Utica hasn’t lived up to the hype so far. The oil-soaked section of the formation in central Ohio has disappointed drillers because underground pressure is insufficient to force crude to the surface in commercial quantities. That has required companies to invest in specialized pumps and other well equipment to coax the crude out of the ground, Jim Pritt of EnerVest Ltd. told a gathering of energy executives in Columbus, Ohio, in October 2012.

Since then, producers have focused drilling on sections of the Utica with higher pressure that hold primarily gas byproducts such as ethane, used by chemical companies to make plastics.

American Energy said gathering and processing on 80 percent of its Utica acreage will be handled by a joint venture of MarkWest Energy Partners LP and Energy & Minerals, according to the statement.

Jefferies Group LLC gave financial advice to American Energy while Commercial Law Group, Andrews Kurth LLP and Duane Morris LLP provided legal advice. Baker Botts LLP represented Energy & Minerals and Latham & Watkins LLP advised GSO and certain other lenders, according to the statement.

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