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Chevron Builds Marcellus Portfolio

Chevron Corp. on Wednesday added 228,000 net leasehold acres to its Marcellus Shale holdings under an agreement with privately held Chief Oil & Gas LLC and Tug Hill Inc.

The transaction, for an undisclosed amount, would give the oil major an estimated 5 Tcf of additional natural gas resource in the play and move it into sixth place among the leaseholders, with an estimated 714,000 net acres. The leader, Chesapeake Energy Corp., has an estimated 1.73 million acres in the play.

Based on recent transactions, Chevron likely paid close to $5,000 an acre, which would price the deal at close to $1.25 billion, an energy analyst told NGI. A Chevron spokesman would only say "the transaction is not financially material."

Vice Chairman George Kirkland said the opportunity "is aligned with our strategy to acquire early-in-life assets with long-term organic growth potential."

Earlier this year the San Ramon, CA-based producer completed the deal that gave it initial entry into the Marcellus, a nearly $5 billion transaction to buy Pittsburgh-based Atlas Energy Inc. (see Daily GPI, Feb. 10; Nov. 10, 2010). The Atlas purchase handed Chevron close to one million acres in several shale basins, with almost half of it in the Marcellus Shale.

Gary Luquette, president of the company's North America Exploration and Production Co., said the expansion "gives us additional high-quality resources with strong growth potential, as well as proximity to and synergy with existing operations."

The transaction is expected to close before the end of June.

Last week during the company's quarterly earnings conference call, Luquette told financial analysts that North America was a key part of Chevron's long-term strategy.

"North America has a tremendous natural resource base...close to fully developed infrastructure serving large markets, making it an attractive place to do business," Luquette said. "In total, our North American operations account for about one-quarter of Chevron's production."

The Atlas transaction, which includes a joint venture component that reduces Chevron's near-term investment, is "in one of the sweet spots in the Marcellus Shale, one of the key shale gas plays in North America," Luquette noted last week.

"We have a very active year planned," he said of Chevron's shale activities in North America. "There are currently nine rigs operating in the Marcellus, and we expect to drill a total of 70 wells this year. We expect 2011 production for both the Marcellus and Antrim shales to average about 115 MMcf/d of gas.

"Our pace is measured...This is a long-term play for us. We're in a great position as we ramp up for a multi-year drilling program...Admittedly, it's very early, but all signs are positive. And we expect to capture the value we identified in our initial evaluation.

"We also realize that there [are] going to be things that we're going to develop and learn from this asset base that's going to be very applicable to some of the shale gas acquisitions, the acreage that we picked up over the course of 2010. So we're going to start working on surrounding this organization with the center of expertise for shale gas that will allow us to leverage those learnings. But at the same time, we want to be very careful that our start in the Marcellus is a good one, a safe one, a reliable one, so that we can build a very sound base there for decades to come."

Luquette was asked last Friday whether Chevron was considering bolt-on acquisitions to its North American shale base. He said the company was watching opportunities as they were unfolding.

"We're evaluating opportunities as they come along. Many of these opportunities that present themselves are quite pricey because there were independents that got involved very early on in some of the land acquisition. So we're going to continue to look and evaluate opportunities...

"As we do our regional analysis to try to understand the geology and the producing mechanisms, we're looking across the board. Some of those lead us very early into possible entry positions, early entry positions and others. People have already acquired the land and we're continuing to look at ways that Chevron can create value in those plays."

Chevron plans to drill around 70 wells this year in the Marcellus and Antrim shales, "which is about five times what [Atlas] drilled in 2010," Luquette said last week. "So we're on a very steep curve. It's very early in the processing of that resource base, so we expect to continue to increase our activity levels there but at a very measured pace to make sure that we get it done right, the Chevron way."

The Atlas acquisition led Chevron to establish a business unit to focus on the onshore shale properties.

"Initially the new business unit is going to be focused on the recent acquisitions, the assets that Atlas had in the portfolio that includes the Marcellus, as well as the Antrim production out of Michigan," Luquette told analysts. "We want this unit to get focused early on on those assets to make sure that we have a smooth transition, a smooth integration and we get started on the right foot."

Like Atlas, Chief was an early entrant into the Marcellus after selling most of its substantial leasehold in the Barnett Shale in 2006 to Devon Energy Corp. for $2.2 billion (see Daily GPI, May 3, 2006). Chief at the time was the second largest producer in the Barnett after Devon. Chief and some partners then reinvested in the Barnett, selling out to Quicksilver Resources Inc. in 2008 for $1.3 billion (see Daily GPI, July 8, 2008).

Chief and its partners at one time held close to 650,000 net acres in the Marcellus, which they acquired in early days for an estimated $100/acre. However, in the past two years the massive leasehold has been whittled down.

In August 2009 Chief agreed to partner with Canada's Enerplus Resources Fund on 159,000 acres for a $400 million payday (see Daily GPI, Aug. 21, 2009). Late last year EXCO Resources Inc. paid Chief close to $460 million to acquire close to 50,000 acres (see Shale Daily, Dec. 23, 2010).

Chief, which is based in Dallas, has no plans to exit the Marcellus, said CEO Trevor Rees-Jones.

Once the agreement with Chevron is completed, he said Chief and Tug Hill, which is an investment firm affiliated with the producer, would have about 125,000 acres in the Marcellus, focused in Bradford, Susquehanna, Tioga, Sullivan and Wyoming counties of northeastern Pennsylvania.

"Chief will maintain its regional office in Wexford, PA, as well as its office in Lycoming County [PA]," Rees-Jones said. "Chief's midstream subsidiary, Chief Gathering, will not be affected by the sale and will maintain its field office in Lycoming County and continue to develop its planned pipeline infrastructure in Pennsylvania."

In the past four years Chief has drilled 131 wells in the Marcellus Shale and "will remain an active operator," said the CEO. "Chief plans to exit 2011 as operator of three rigs drilling in the Marcellus Shale, not counting nonoperated interests owned in leases and units being drilled by multiple rigs operated by others."

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