Chesapeake Energy agrees to acquire Gothic Energy

Chesapeake Energy Corp., Oklahoma City, announced Friday that it will acquire Tulsa-based Gothic Energy Corp., in a stock swap valued at $345 million. The deal will create the 10th largest independent natural gas producer in the US, says Chesapeake. Chesapeake will acquire Gothic's 310 bcfe of reserves at a cost of $1.05/Mcfe.


Chesapeake Energy Corp., Oklahoma City, announced Friday that it will acquire Tulsa-based Gothic Energy Corp., in a stock swap valued at $345 million. The deal will create the 10th largest independent natural gas producer in the US, says Chesapeake. Chesapeake will acquire Gothic's 310 bcfe of reserves at a cost of $1.05/Mcfe.

"This acquisition fits perfectly with Chesapeake's business strategy of creating value by acquiring and developing low-cost, long-lived natural gas assets onshore in North America, with a principal focus in the Midcontinent, while at the same time steadily improving our balance sheet," said Aubrey K. McClendon, Chesapeake's chairman and CEO.

Michael K. Paulk, CEO of Gothic, says the acquisition will result in a significant premium for Gothic's shareholders, will enable company bondholders to realize a full return on their investment, and "helps solidify Chesapeake's position as one of the top three producers of natural gas in the Midcontinent." The firm expects the deal to be accretive to its cash flow and earnings.

Swap agreement terms
Under the agreement, Chesapeake will acquire all of Gothic Energy's common stock in exchange for 4 million shares of Chesapeake's common stock. Upon close of the transaction, Gothic's shareholders will own approximately 2.7% of Chesapeake's common stock.

In addition, Chesapeake has recently purchased in a series of private transactions 96% of Gothic's $104 million worth of 14.125% senior discount notes for $77 million�$22 million in cash and $55 million in Chesapeake common stock.

The acquisition price values reserves at $1.05/Mcfe after allocation of $20 million of the purchase price to Gothic's leasehold inventory, 3D seismic inventory, lease operating telemetry system, and other assets. Gothic's proved reserves are 96% natural gas, 78% proven and developed, and have an average lifting cost of less than $0.20/Mcfe.

The vast majority of Gothic's assets were once owned by predecessors of BP Amoco PLC. These properties are characterized by very low operating costs, long reserve lives, and abundant upside opportunities, and they are 96% natural gas.

The reserves are located exclusively in Chesapeake's core Midcontinent operating area and are unhedged after October 2000. Based on current production rates of 80 MMcfed, Gothic has an 11-year reserves-to-production index.

The transaction will increase Chesapeake's current proved reserves by 25% to about 1.6 tcfe and its current daily production by 22% to 450 MMcfe. Chesapeake also expects to realize $10 million/year of administrative and operational efficiencies and $15 million in noncash interest savings by retiring Gothic's 14.125% senior discount notes.

Because Chesapeake's asset base completely overlaps Gothic's, there will be substantial operational and exploration efficiencies resulting from this combination, says Chesapeake. The firm will now be the largest owner in two of Oklahoma's most prolific gas fields, Watonga-Chickasha and Cement.

Gothic's previously announced plan of restructuring�which involved redemption of Chesapeake's holdings of Gothic preferred and common shares for oil and gas properties and other considerations, exchange of the $104 million senior discount note issue for 94% of Gothic's equity, and an equity rights offering of $15 million�has been terminated in anticipation of this transaction.

The boards of both companies have unanimously approved the transaction. The acquisition is expected to close by yearend 2000, pending regulatory approvals and a Gothic shareholder vote. Gothic plans to hold a special shareholder meeting as soon as possible following completion of the SEC's review of the S-4 proxy statement, which Chesapeake anticipates filing in the next few weeks.

Gothic has agreed to provide Chesapeake with a $10 million break-up fee in the event the transaction is not completed. Bear, Stearns & Co. Inc. advised Chesapeake, and CIBC World Markets advised Gothic.

Chesapeake announced earlier this month that it had acquired other Midcontinent assets in three separate transactions from an undisclosed seller or sellers valued at $22 million total (OGJ Online, June 15, 2000). The assets included 33 bcf of gas in Oklahoma's Arkoma basin. These properties are contiguous to or near Chesapeake's existing base of operations in eastern Oklahoma and have numerous drilling opportunities associated with them, says the firm.

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