Chesapeake Energy Corporation (CHK) has joined hands with the world’s fifth largest integrated oil and gas company Total S.A. or Total (TOT) for the development of Barnett Shale assets by creating a joint venture. Total will acquire a 25% interest in Chesapeake’s upstream Barnett Shale assets. In consideration, Total will pay $800 million in cash at closing, which is anticipated by the end of this month and subject to regulatory approval. Total will pay an additional $1.45 billion by funding 60% of Chesapeake’s share of drilling and completion expenditures until the entire obligation has been exhausted, which Chesapeake expects will occur by year-end 2012.

This is Chesapeake’s fourth joint venture transaction in the Big 4 shale plays of Barnett Shale, Marcellus Shale, Haynesville Shale and Fayetteville Shale. The other partners include world-class companies such as Plains Exploration & Production Company (PXP), BP America (BP) and Statoil ASA (STO).

The assets of the newly created joint venture include about 270,000 net acres of leasehold in the Core and Tier 1 areas of Barnett, with approximately 700 million cubic feet of natural gas equivalent per day of current net production and approximately 3.0 trillion cubic feet of natural gas equivalent (Tcfe) of proved reserves (0.75 Tcfe net to Total).

Under the terms of the agreement, Total will acquire its 25% share on promoted terms of the new acreage acquired by Chesapeake until Dec 31, 2015. After this date, Total will have to pay 25% of Chesapeake’s support costs related to the joint venture’s corporate development activities.

While we believe that a prominent negative in the Chesapeake story is its more leveraged balance sheet than the peer group, this transaction will allow the company to reduce its financial leverage. Additionally, the transaction will also support its future capital expenditure need and further position it to deliver industry-leading finding and development costs and returns on capital.

Following this $2.25 billion deal, Chesapeake shares jumped 8.54% yesterday to $28.09.

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