Chesapeake Energy Corp. is buying fellow Oklahoma City independent Gothic Energy Corp. for $345 million in stock and cash, creating the 10th largest natural gas producer in the U.S. Chesapeake's proved reserves will grow 25% to 1.6 trillion cu. ft. of natural gas equivalent; daily production will increase 22% to 450 million cu. ft. of gas equivalent. Chesapeake, which already owns 2.4 million shares of Gothic common, will acquire the remaining 16.2 million shares, plus employee and director options, for 4.0 million of its own common. Gothic shareholders will wind up with approximately 2.7% of Chesapeake common as a result. Chesapeake also will assume Gothic's $235 million of senior secured debt and expects to record the transaction using purchase accounting. Gothic has agreed to pay a $10-million fee to Chesapeake if the deal is not completed. Bear Stearns & Co. advised Chesapeake in the transaction, while CIBC World Markets advised Gothic. Chesapeake also recently purchased 96% of Gothic's $104 million of 14.125% senior discount notes for $77 million, comprised of $22 million in cash and $55 million in Chesapeake common stock (approximately 7.8 million shares). It expects to realize $10 million per year of administrative and operational efficiencies and $15 million in noncash interest savings by retiring the Gothic senior discount debt. The acquisition follows Chesapeake's strategy of acquiring and developing low-cost, long-lived gas assets onshore in North America, principally in the U.S. Midcontinent, while steadily improving its balance sheet, according to Aubrey K. McClendon, the company's chairman. "Predominantly all of Gothic's assets were once owned by Amoco Corp. and are among the highest quality gas assets in the United States," he said. "These properties are characterized by very low operating costs, long reserve lives and abundant upside opportunities. They also are 96% natural gas." The purchase is expected to increase the company's 2001 EBITDA (earnings before interest, taxes, depreciation and amortization) 21%, cash flow 23%, and net income 23%. "Including the impact of this transaction, projected excess cash flow and the retirement of $170 million of preferred stock, including preferred dividends, to date, we anticipate 400 billion cu. ft. of gas equivalent of proved additions during the year, with no net increase in fixed obligations," McClendon said. -Petroleum Finance Week
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