KKR, Chesapeake Chase Profits from Natural Gas (KKR, CHK, SJT, HGT, BPT)

Investment firm Kohlberg Kravis Roberts & Co. L.P. (NYSE: KKR) and natural gas producer Chesapeake Energy Corp. (NYSE: CHK) have announced the formation of a new partnership to invest in royalties “in key oil and gas basins in the United States.” There are already 13 similar royalty trusts that trade on US markets, so this is not exactly a new idea. Some of the better known ones are San Juan Basin Royalty Trust (NYSE: SJT), the Hugoton Royalty Trust (NYSE: HGT), and the BP Prudhoe Bay Royalty Trust (NYSE: BPT).

According to the announcement from KKR and Chesapeake:

Under the terms of the arrangement, KKR and Chesapeake will make an initial combined $250 million commitment to the partnership. Chesapeake will contribute 10% of the total commitment and will receive a promoted ownership in the partnership. KKR and Chesapeake will jointly oversee the partnership while Chesapeake will source, acquire and manage the royalty investment opportunities.

Chesapeake already participates in royalty investments, to the tune of $900 million according to this morning’s announcement. The deal with KKR gives Chesapeake the cash to do what they were doing anyway — buying rights and royalties instead of leasing them — in exchange for future returns. It’s a good deal for Chesapeake, and may turn out to be a good deal for KKR.