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Chesapeake Granite Wash IPO: Favorably Structured, Easy Recommend

Chesapeake Granite Wash Trust is a Delaware statutory trust formed in June 2011 to own (a) royalty interests to be conveyed to the trust by Chesapeake in 69 existing horizontal wells in the Colony Granite Wash play located in Washita County in western Oklahoma (the "Producing Wells") and (b) royalty interests in 118 horizontal development wells.

These growth Trusts have gotten popular recently as a vehicle for aggressive E&P operations to raise money from mature fields to fund capex/pay down debt. As long as they continue to be structured for the unitholder as favorably as this one and SDT/PER, they should continue to work out well.

Colony Granite Wash Formation - 45,500 gross acres (28,700) held by CHK located in the Anadarko Basin in western Oklahoma. 44.3 mmboe, consisting of 18.6 mmboe in the developed wells and 25.7 mmboe in the development wells. 19% oil, 31% natural gas liquids and 50% natural gas located at 11,500-13,000 feet.

Note that unlike SDT/PER, natural gas will make up a higher percentage of production here than oil. Oil will make up 35%-40% of revenues.

CHK plans on drilling the 118 development wells in proved undeveloped locations by 6/30/15.

Royalty Interest - 90% of the net proceeds in the 69 existing horizontal wells and 50% of the net proceeds from the 118 planned development wells.

CHK owns a 47% net revenue interest in the producing properties and 53% net revenue interest in the development properties. As such the Trust will have a 42% net revenue interest in the producing properties and a 26% net revenue interest in the development wells.

Hedges - 37% of expected revenues to be hedged through 9/30/15. Oil is hedged at an average of $87.42 per barrel through 9/30/15. Note that natural gas production is unhedged.

Trust lifespan to be 20 years, although as we've noted, distributions will begin decreasing annually from 2015 with distributions under $2 annually beginning 2017.