Australian energy giant BHP Billiton Petroleum has become the latest international energy heavyweight to buy into U.S. shale plays with a transaction to acquire Chesapeake Energy Corp.'s Fayetteville Shale portfolio for $4.75 billion cash.
The BHP Billiton Ltd. unit would acquire 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. The transaction was announced on Monday.
Chesapeake, the second largest gas producer in the Fayetteville Shale after Southwestern Energy Co., holds 487,000 net acres in the play. Southwestern has 888,695 net acres in the play, while ExxonMobil Corp. has 567,000 net acres.
Australia's largest oil and gas company would add more than 10 Tcf of gas resources with the shale purchase, said J Michael Yeager, CEO of the petroleum unit.
"This transaction marks BHP Billiton's entry into the U.S. shale business," Yeager said. "The operated position we are obtaining will immediately make BHP Billiton a major North American shale gas producer." Together with its natural gas assets in Western Australia and substantial U.S. Gulf of Mexico projects the Chesapeake deal helps BHP become a "very, very powerful" producer.
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 Shale Daily, 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."
The latest announcement comes a week after Chesapeake completed a $570 million cooperation agreement giving a subsidiary of China's CNOOC Ltd. a one-third interest in Chesapeake's 800,000 net acres in the Denver-Julesburg and Powder River basins of the Niobrara Shale (see Daily GPI, Feb. 3).
One question is how BP plc will fit into the BHP transaction. A U.S. unit of BP paid $1.9 billion to buy a one-quarter stake in Chesapeake's Fayetteville assets in 2008 (see Daily GPI, Sept. 3, 2008).
BHP Billiton Petroleum said it produced 158.6 million boe in fiscal year 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, which is headquartered in Houston, is a familiar name to GOM deepwater explorers. It was one of 13 producers given the green light by federal officials to resume deepwater drilling activity in the GOM once newly enacted requirements were completed (see Daily GPI, Jan. 4).
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, including helming its major joint venture capital projects.
Analysts reacted favorably to the transaction.
BHP paid about $1.98/Mcf for the estimated proven reserves in the play, according to Global Hunter Securities. By comparison, ExxonMobil's XTO Energy Corp. in December paid $1.92/Mcf when it acquired Fayetteville assets from Petrohawk Energy Corp. (see Shale Daily, Dec. 27, 2010).
"The valuation looks full, but not over the top, especially if and when U.S. gas prices start firming again," wrote analysts with Platypus Asset Management Ltd., which is based in Australia. "It's a bet on long-term U.S. gas prices going higher." BHP's management team has "entered a new business but...met the criteria that they have articulated for acquisitions, that is, tier-one, low-cost, long-life and expandable assets."
Tudor, Pickering, Holt & Co. (TPH) analysts wrote Tuesday of the transaction that it was "hard not to see this coming but was likely faster than most investors expected..." With Chesapeake's announced sales this year the company should have "$5.5 billion in the door in early 2011, with more activity on the way, for what we think is likely to be the best" story among exploration and production companies as the sector heads into 2012.
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."
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.
BHP's "credit profile can accommodate the proposed acquisition and buyback, given the group's strong cash flow generation and conservative financial profile," wrote Standard & Poor's analysts. BHP's credit rating of "A+" isn't immediately affected by the acquisition, they said.
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.