Plains E&P has revealed that earlier this month they amended their Haynesville JV deal with Chesapeake Energy to allow them to opt out of half of the deal. By the end of June 2010 for a cost of $800 million, Plains can bust 50% of the 110,000 Haynesville acres they acquired in July 2008 from Chesapeake. Would they do it? According to Calyon Securities analyst Jeb Armstrong, not likely. "We believe that PXP would only exercise the option in a doomsday scenario, namely if it were facing a liquidity issue and would not be able to cover its entire $1.65 billion obligation to Chesapeake. The economics of the Haynesville Shale are among the best of any onshore play in the U.S. It is extremely unlikely that PXP would choose to exercise the option in order to redeploy capital to a more prospective area or to another JV in the Haynesville with more attractive terms." Plains has already paid Chesapeake $1.65 billion up front in cash, with an agreement to fund half of Chesapeake's 80% share of costs going forward until an additional $1.65 billion is paid. The option to beg out of 55,000 acres values the acreage at $14,400, or roughly half of the $30,000 it paid when it entered the JV, says Armstrong. Why would Chesapeake give them an out once the deal was inked? Consider that Chesapeake CEO Aubrey McClendon and Plains CEO Jim Flores are friends going way back, and friends take care of friends. The out is simply a safety valve for the aforementioned "doomsday" just in case. Would Chesapeake care if they did opt out? Again, not likely. The break-up deal involves no cash paid and only funds promised. Chesapeake already has its up front and is still getting it's huge carry through mid 2010. Natural gas prices will probably rebound enough in that period to create enough cash flow to lessen the lost carry. And Chesapeake will just do it again. I wouldn't bet against them packaging up those 55,000 acres from Plains, throwing in a few more from their ongoing lease program, and JV a prime piece of the Haynesville to another eager player with cash. It could happen.
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