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Australia's BHP Billiton Grabs Fayetteville Leasehold

Australian energy giant BHP Billiton Petroleum, better known for its Gulf of Mexico (GOM) development, chiseled off a piece of Chesapeake Energy Corp.'s huge U.S. portfolio in a $4.75 billion cash deal to acquire almost half a billion acres in the Fayetteville Shale.

The transaction, announced on Monday, gives the BHP Billiton Ltd. unit all of Chesapeake's existing net production in the Arkansas gas shale, which includes current output of about 415 MMcfe/d and midstream assets that include 420 miles of pipeline.

Chesapeake, which is the second largest gas producer in the Fayetteville Shale after Southwestern Energy Co., holds 487,000 net acres in the play.

"The purchase of this long-life field immediately adds over 10 Tcf of gas resources to our portfolio and is consistent with our strategy of investing in large, low-cost assets with significant volume growth for future development," said BHP Billiton Petroleum CEO J. Michael Yeager.

Chesapeake also agreed to provide essential services in the Arkansas leasehold for up to one year. The transaction comes just weeks after the Oklahoma City-based independent said it would sell the Fayetteville Shale assets and other equity investments as part of its revamped strategy over the coming two years to cut long-term debt by 25% while achieving a 25% gain in production growth, its "25/25 Plan" (see Daily GPI, Feb. 8).

Chesapeake CEO Aubrey K. McClendon said the sale allows the company to "quickly achieve substantial progress in implementing the debt reduction targets of our previously announced 25/25 Plan."

BHP Billiton Petroleum said it produced 158.6 million boe in fiscal 2010, which represented a 15% annual continued volume growth over fiscal year 2009 and an 11% compound annual growth rate for production since fiscal year 2007.

The unit's CEO also knows his way around the United States. Yeager joined the company in April 2006 after holding several senior positions at ExxonMobil Corp., including helming its major joint venture capital projects.

The BHP petroleum unit, which is headquartered in Houston, is a familiar name to GOM deepwater explorers. It was, in fact, one of 13 producers given the greenlight by federal officials to resume deepwater drilling activity in the GOM once newly enacted requirements were completed (see Daily GPI, Jan. 4).

Among BHP's biggest GOM operations is the Shenzi field (44% equity), which ramped up in March 2009. The field, which includes the Genghis Khan discovery, covers four blocks in Green Canyon, and the Shenzi facility, in 4,300 feet of water, is one of the deepest tension leg platforms in the world.

The Mad Dog field in Green Canyon, in which BHP has nearly a one-quarter stake, began producing in January 2005. BHP operates the Mad Dog South field; BP plc is the overall field operator. BHP also jointly operates the gassy Atlantis and Neptune fields in the Western Atwater Foldbelt region of the GOM deepwater.

In addition, the BHP petroleum unit also operates in Canada and currently is developing potash in Saskatchewan.

For Chesapeake, the transaction was viewed favorably by financial analysts.

JP Morgan analysts said the $4.75 billion sale price was "better than expected" and said Chesapeake could "easily achieve its goal" to bring in more than $5 billion pre-tax proceeds by selling the Arkansas leasehold and its equity investments.

The Goldman Sachs team said the deal price was in line with Petrohawk Energy Corp.'s recent Fayetteville asset sale and "slightly below the 50 cents/Mcfe where Southwestern Energy trades." The upside for Chesapeake, said analysts, "is already in [the] shares," which rose earlier this month when the company first announced that it would trim its portfolio.

Assuming $300 million of the purchase price is associated with monetizing Chesapeake's hedges, "we estimate the transaction equates to a 10.7 [times] production rate multiple," wrote analysts with Canaccord Genuity. "We view this price as highly attractive given the assets are 100% gas...The transaction effectively alleviates the company's liquidity concerns over the next several years."

The transaction, said the Canaccord Genuity team, "highlights the liquidity currently available" to the exploration and production sector "and shows there is still market appetite for shale gas assets."

Chesapeake's management team is to discuss the transaction in more detail during a quarterly earnings conference call on Wednesday, according to a company spokesman. The parties expect to complete the deal by the end of June. Chesapeake's adviser on the transaction was Jefferies & Co. Inc.

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