Chevron Corp., one of the few major oil companies without a visible presence in the North American shale plays, last week made up for lost time in a deal to buy Atlas Energy Inc. for an estimated $4.3 billion. The transaction, CEO John Watson told energy analysts, may be only the first.

Atlas, based in Pittsburgh, is a big shale player across the Northeast and into the Upper Midwest, with close to 486,000 net acres in the Marcellus Shale alone. It also holds an estimated 623,000 acres in the Utica Shale, as well more than 370,000 acres in Michigan in the Antrim Shale (270,000 acres) and the Collingwood/Utica play (115,000 acres) (see NGI, May 10). In addition Atlas has about 120,000 acres in the Chattanooga Shale and 123,000 acres in the New Albany Shale.

However, Atlas offers more than just an enticing leasehold. Chevron would gain a joint venture (JV) partnership in the Marcellus play that was put together earlier this year by Atlas with India’s Reliance Industries Ltd. Chevron would assume the role of operator with 60% participation under the original agreement terms, while Reliance would continue to fund 75% of the operator’s drilling costs, up to $1.4 billion (see NGI, April 26; April 12).

A 49% interest in the Laurel Mountain Midstream LLC, a JV with Williams Cos., also is part of the transaction (see NGI, April 6, 2009). The partners own more than 1,000 miles of intrastate and natural gas gathering lines servicing the Marcellus.

“This acquisition is the right opportunity for Chevron,” said Chevron Vice Chairman George L. Kirkland. “We are acquiring a company that has one of the premier acreage positions in the prolific Marcellus. The high-quality resource, competitive cost structure in the Marcellus, strong growth potential of the asset base and its proximity to premier natural gas markets make this targeted acquisition a compelling investment for Chevron.”

Under the agreement, Chevron would pay Atlas $3.2 billion in cash and assume about $1.1 billion in net debt. The acquisition is subject to some Atlas restructuring transactions regarding its partnerships, approval by Atlas shareholders and regulatory clearance.

When the transaction closes, Chevron would gain an estimated 9 Tcf of gas resources from Atlas, including 850 Bcf of proved reserves and 80 MMcf/d of production.

By comparison ExxonMobil Corp. acquired 45 Tcfe in its $43 billion acquisition of XTO Energy Corp. earlier this year (see NGI, June 28). Royal Dutch Shell plc paid $4.7 billion earlier this year to acquire subsidiaries of privately held East Resources Inc. (see NGI, May 31). In the Marcellus play East had almost 1.05 million net acres, including 65,000 that it operated; the leasehold was producing about 60 MMcfe/d (10,000 boe/d), predominately gas.

The Atlas assets, Kirkland said, “further advance Chevron’s global shale gas position, complementing the company’s recent entrance into shale gas opportunities in Poland, Romania and Canada.”

Chevron has a tight gas leasehold in the Piceance Basin of Colorado, as well as close to one million net acres of unconventional resource leasehold globally, including about 675,000 acres in Romania, 200,000 acres in Western Canada and 200,000 acres in Poland.

Gary Luquette, president of the oil major’s North America Exploration and Production unit, said Atlas “brings to us a highly skilled team with strong operating experience and established land management capabilities. This knowledge, together with Chevron’s technical expertise and global experience with large-scale project developments, will create strong organizational synergies.”

In the transaction Atlas shareholders would receive $38.25/share in cash for their stock and more than 41 million units of Atlas Pipeline Holdings LP (AHD) once restructuring transactions are completed. Based on AHD’s closing price on Monday, the units would be valued at about $5.09/share.

To complete the sale to Chevron, Atlas would acquire the Laurel Mountain Midstream JV stake from AHD for $403 million. Atlas also would sell all of its interests in existing investment partnerships, 175 Bcf of proved gas reserves and other energy assets to AHD for $250 million, comprised of $30 million in cash and $220 million in newly issued AHD units.

The deal would boost Atlas’ stake in AHD to 81%, but once the transaction is completed the pipeline partnership would no longer be controlled by Atlas.

Chevron’s CEO on Thursday added a bit of color to the deal at the Bank of America Merrill Lynch Global Energy Conference. More deals could be in the offing, Watson told the audience.

“We will acquire more companies going forward but we have a good portfolio and we are not in a position where we have to do a particular type of acquisition,” Watson told analysts. “If we see something that would nicely match with what we have, we would consider it.”

Acknowledging that it has been somewhat of a latecomer to the shale plays, Watson said the company waited to buy until it was able “to get the kind of terms we wanted…We’re not in a position where we have to do an acquisition.”

Atlas, however, had “all the ingredients” that made it attractive to Chevron. “We view the Marcellus as one of the lowest cost natural gas supply source in North America.” Any future transactions would be driven by “economics” instead of a need to add a certain type of resource to Chevron’s portfolio.

Chevron has big plans for the Atlas portfolio, he said, with intentions to increase total output to 100,000 boe/d from the current rate of about 13,000 boe/d. Gas production from the Atlas assets is expected to increase to more than 500 MMcf/d over the next 10 years.

Energy analysts viewed the tie-up as a positive for gas deals and gas prices over the long-term.

FBR Capital Markets analysts Rehan Rashid and Saurabh Lele said after adjusting for “many of the non-Marcellus moving parts,” the transaction is valued at $4,063 per dry gas acre and $8,014 per wet gas acre. They “believe the transaction was a statement on Marcellus acreage and a cheap call option on natural gas price recovery…With the land grab ongoing for quite some time, Marcellus’ large blocky positions are now hard to come by. As such, we fell that the economic justification was the 180,000-acre wet gas area [in southwestern Pennsylvania] and that the dry gas is the long-term call option on natural gas price/margin recovery.”

Writing for TheStreet.com, financial analyst Jim Cramer said, “Now ExxonMobil doesn’t look all that stupid,” referring to the oil major’s buyout of XTO.

“People have been livid with Exxon ever since it bought XTO Energy for a huge amount of money…at the top of the natural gas cycle,” Cramer wrote. “Now, the $4.3 billion bid for Atlas Energy by Chevron is small potatoes, but people felt that there was no momentum at all to the natural gas market and that Exxon simply had misread the dynamic entirely.

“They didn’t understand the state of play of how hated this industry was and how President Obama personally seemed to hate it — that he preferred coal, that he preferred anything but and that there was no way he was going to insert a carbon bridge fuel into the equation because he is a total purist and natural gas is the enemy. But Chevron’s buy says something else is happening.”

Analysts at Tudor, Pickering, Holt & Co. also chipped in, noting that the move by Chevron was a “positive” for other gassy explorers “as chasing likely begins…there are buyers of assets if the stock market won’t.”

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