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Would BP Want All of Chesapeake -- or Just a Bit More?

Could London's BP plc actually be interested in taking over Chesapeake Energy Corp.? Rumors persisted last week that the major might have a deal in the works to buy the natural gas producer, but financial analysts said a buyout was unlikely considering the size of Chesapeake and BP's decision last year to trim its sails.

Rumors that BP wanted to buy the Oklahoma City-based natural gas explorer have been circulating since at least mid-October (see NGI, Oct. 20). However, the rumors may be founded partly on the two companies' joint transactions to date.

BP has partnered with Chesapeake on two transactions this year, spending a total of around $365 billion to acquire Woodford and Fayetteville shale properties (see NGI, Sept. 8). BP CEO Tony Hayward said late last month that the major wanted to take advantage of "new opportunities" that have arisen because of credit market turmoil, but he did not indicate that those opportunities might be (see NGI, Nov. 3a). Since he has taken over BP, Hayward has been attempting to make the energy behemoth more efficient -- and so far, so good.

"We are well placed to weather the prevailing financial storm and to benefit from the business opportunities that may well arise from a downturn," Hayward said.

Besides its deals with BP, Chesapeake has put several other gas-rich pieces of its portfolio up for sale this year. CEO Aubrey McClendon said on Oct. 31 that Chesapeake had nearly completed previously announced plans to sell a stake in its Marcellus Shale holdings, but he did not indicate who the buyer might be (see NGI, Nov. 3b).

Neither BP nor Chesapeake spokespeople would comment on the rumors, but financial analysts offered their take on what is causing the noise..

"Rumors are swirling about BP closing the deal on the Marcellus," said AG Asset Management's Gus Scacco. "BP closing the deal will free up capital for Chesapeake."

Others think Chesapeake is poised for a takeover because the independent, considered one of the top gas producers in the United States, has accumulated a lot of debt in its quest to expand its North American portfolio.

"Chesapeake shares have come down significantly from its July high of around $74, and because of this decrease in their stock price, Chesapeake is now considered to be a takeover candidate," wrote vFinance Investments' William Lefkowitz.

"Chesapeake has a large acreage position in natural gas, so it's a pretty attractive growth opportunity for a larger company," said Morningstar analyst Justin Perucki. "It would help [BP's] North America growth profile, to say the least." However, Perucki said taking over a company the size of Chesapeake would be a challenge for anybody given the current market conditions.

"Any buyout would involve a lot of equity," he said. "BP does have a lot of cash, but at the end of the day, I think it's a low-probability event."

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