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In Natural Gas Bust, Boom Town Teaches Drillers a Lesson

The aggressive mentality that led Chesapeake Energy to amass the second-largest collection of shale assets in the U.S. -- second only to Exxon Mobil (XOM) -- is on display once again, even as the boom has gone bust. Chesapeake has twice the level of debt of a company 27 times its size in Exxon Mobil.

This week, Chesapeake Energy officials were back in Caddo Parish to make a bid on Haynesville acreage. The price per acre being offered by Chesapeake says all that needs to be said about the cycling from boom to bust.

In July 2008, just as the press was chasing the Haynesville boom story, the high bid for shale drilling acreage in Caddo Parish was $30,212 per acre and a 30% royalty. By April to July 2010, Caddo Parish was accepting bids at $6,867 and $7,537, both with a 25% royalty.

Chesapeake Energy's latest offer? Not to exceed $1,500 per acre and a 25% royalty. Glass said that twice in the recent past Chesapeake Energy came to Caddo Parish with declining bids of $5,000 and $3,000 per acre before the latest drop to $1,500.

It's not just Chesapeake's insatiable need for acreage that is on display in the Haynesville negotiations (though the company can make the case that it is now a deep value buyer, opportunistically acquiring for a better day). It's also a sign of the parish's fiscal discipline that it doesn't have to say yes to Chesapeake at natural gas bust prices.

"The last two times the parish elected not to do it, because the price was not high enough and unless they pay a premium the parish will just sit on the acreage, " Glass said. Glass expected that the parish would likely reject Chesapeake's latest offer, too. "We don't need the money. The parish can hold out because it is financially strong."

Over the three-year boom that hit its high point in 2008, Caddo Parish was able to amass a $50 million reserve fund. The fund stood at "a few thousand dollars" before the boom. Royalty checks during the boom had averaged as high as $1 million per month for the parish. Last year, royalty checks averaged around $350,000 a month, and in the past few months, the royalty checks have come down to $150,000 to $200,000, Glass said.

Yet Caddo parish still has about $48 million in the reserve trust. Unlike Chesapeake Energy, where critics contend the board is beholden to CEO Aubrey McClendon, in the parish 8 of 12 commissioners must agree to release any money from the trust.

The parish viewed the days of the record $30,000 bid per acre as a one-time bonanza. "We knew it wouldn't happen again and we've been fortunate in trying to protect it," Glass said.

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