Chesapeake Energy 2010 Annual Report Download - page 85

Our goal of a 25% reduction in debt by year-end 2012 is part of our liability management plan begun in
2010. During 2010, we issued in private placements 2.6 million shares of two series of our 5.75% Cumulative
Non-Voting Convertible Preferred Stock resulting in net proceeds to us of approximately $2.562 billion. We
used the net proceeds of these preferred stock offerings to redeem in whole $1.934 billion in principal amount
of four series of our outstanding senior notes. Additionally, through tender offers followed by redemptions, we
purchased $1.5 billion aggregate principal amount of three additional series of senior notes. We funded the
purchase of the notes tendered and redeemed with proceeds from a $2.0 billion public offering of two series of
senior notes. We retired all series of our outstanding senior notes that were issued under our more restrictive
indentures. Excess funds from our offerings were used to repay borrowings outstanding under our corporate
revolving bank credit facility.
During 2011, we plan to take steps to extend the maturity profile of our outstanding indebtedness at
advantageous rates. On February 11, 2011, the company issued $1.0 billion principal amount of 6.125% Senior
Notes due 2021 in a registered public offering. We applied the net proceeds of $977 million from the offering to
our revolving bank credit facility balance and plan to use proceeds from asset sales to retire at least $2.0 - $3.0
billion of our shorter-dated senior notes and also to reduce borrowings under our revolving bank credit facility.
Asset monetizations were also key elements of our strategic and financial plan in 2010 and early 2011, as
described below.
Industry Participation Agreements
In 2010, Chesapeake completed its fourth and fifth significant industry participation agreements in
unconventional natural gas and oil plays. In January 2010, Total E&P USA, Inc., a wholly owned subsidiary of
Total S.A. (Total), purchased a 25% undivided interest in 270,000 net acres of our Barnett Shale leasehold,
along with 840 bcfe of estimated proved reserves, for approximately $800 million in cash (plus $78 million of
drilling and completion carries due from the effective date of the transaction to the closing date). Total agreed
to fund 60% of our share of future drilling and completion expenditures in the Barnett Shale until it has paid a
total of $1.45 billion in drilling and completion carries, which we expect to occur by year-end 2013. In
November 2010, a wholly owned subsidiary of CNOOC Limited (CNOOC) purchased a 33.3% undivided
interest in 600,000 net acres of our Eagle Ford Shale leasehold, along with 18.2 bcfe of estimated proved
reserves, for approximately $1.12 billion in cash. In addition, CNOOC agreed to fund 75% of our share of
drilling and completion costs in the Eagle Ford Shale until an additional $1.08 billion has been paid, which we
expect to occur by year-end 2012. All proceeds from these transactions are reflected as a reduction of natural
gas and oil properties with no gain or loss recognized. Both Total and CNOOC have the right to participate
proportionately with us in any additional leasehold we acquire in the Barnett Shale and the Eagle Ford Shale,
respectively, at cost plus a fee.
The following table provides information about our remaining industry participation agreement drilling and
completion carries as of December 31, 2010:
Shale
Play
Industry Participation
Agreement Partner Date
Carries
Remaining
($ in millions)
Marcellus Statoil November 2008 $ 1,362
Barnett Total January 2010 889
Eagle Ford CNOOC November 2010 1,030
$ 3,281
On February 16, 2011, we entered into an industry participation agreement with a wholly owned U.S.
subsidiary of CNOOC Limited (CNOOC) to develop our Niobrara Shale play in the DJ and Powder River Basins
in northeast Colorado and southeast Wyoming. Under the terms of the industry participation agreement,
CNOOC acquired a 33.3% undivided interest in approximately 800,000 net acres of our leasehold. We
received $570 million in cash at closing, and CNOOC has agreed to fund 66.7% of our share of drilling and
completion costs until an additional $697 million has been paid, which we expect to occur by year-end 2014. In
addition, CNOOC has the right to a 33.3% participation in any additional leasehold we acquire in the area at
cost plus a fee.
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