Chesapeake Plans To Increase Columbia Natural Resources' Production

Typography
After agreeing to pay $2.2 billion in cash for Columbia Natural Resources LLC, Chesapeake Energy Corp. officials said Tuesday that they plan an aggressive expansion of Appalachian natural gas production.

CHARLESTON, W.Va. — After agreeing to pay $2.2 billion in cash for Columbia Natural Resources LLC, Chesapeake Energy Corp. officials said Tuesday that they plan an aggressive expansion of Appalachian natural gas production.


Oklahoma City-based Chesapeake announced the agreement to purchase Columbia from Triana Energy Holdings LLC on Monday. The company expects to boost production by up to 10 percent a year by adding six drilling rigs to the existing four used by Columbia and increasing capital expenditures from $65 million a year to about $200 million.


The Columbia acquisition would make Chesapeake the third-largest holder of natural gas reserves in the United States behind Exxon Mobil Corp. and ConocoPhillips, according to the company. Chesapeake expects the deal will close by Dec. 15.


Columbia's reserves are principally located in West Virginia, Kentucky, Ohio, Pennsylvania and New York. Chesapeake's existing production is in Oklahoma, Arkansas, New Mexico, Louisiana, Kansas and Texas.


Chesapeake shares fell 96 cents, or 2.5 percent, to $37.90 in late trading on the New York Stock Exchange. They are still near the high end of their 52-week range of $15.06 to $38.98.


Aubrey K. McClendon, Chesapeake's chief executive officer, said in a conference call that because Columbia was previously owned by a utility and a private equity firm, "we believe the assets have been significantly underexploited."


McClendon said the Appalachian Basin has been dominated by utilities, pipelines, smaller public companies "and then a whole host of kind of smaller -- I'll just call them mom-and-pops, though obviously most of them might be more than that."


"We just think that the basin is open for a fresh look from a company that is truly an exploration company and is truly dedicated to its craft of finding and discovering new reserves of natural gas," he said, "Whether it be from horizontal drilling or deep gas exploration or from looking at formations that otherwise might have been overlooked by others in the area."


Chesapeake's profit rose 51 percent to $439 million in 2004 on a 58 percent rise in revenue to $2.71 billion.


The acquisition of Columbia is Chesapeake's first outside its traditional area of focus for drilling operations that includes onshore properties in the southwestern United States. But Chesapeake is no stranger to acquisitions, having grown 10-fold in the last seven years primarily through acquisitions of less than $600 million.


In August, Chesapeake spent $410 million to purchase four properties, the largest of which was a working interest in 30,000 gross acres in the Barnett Shale of Johnson County, Texas. The purchase included three transactions with three private companies for natural gas production in the eastern and Permian Basin regions of Texas.


Earlier this year, the company bought 18,000 acres north of Fort Worth from Hallwood for $277 million.


Triana bought Columbia from NiSource Inc. in 2003 in a deal reported to be worth $330 million in cash. But that deal involved a three-year sales agreement of all gas production, making it unattractive to most buyers at the time, McClendon said.


Chesapeake said it plans to keep Columbia's offices in Charleston, and doesn't expect to lose any of the about 365 people working there.


"Obviously we're thinking about this being a growth platform so we are going to be hiring rather than laying off," McClendon said. "So we're real excited about the opportunity to once again reinvigorate a basin that for a long time has not had someone as energetic as we think we are."


A major challenge for Chesapeake will be "that we are strangers" in Appalachia, McClendon said.


"So this is a project that will take us quite a bit longer to get going on," he said.


Source: Associated Press