Chevron Corp., which had eschewed domestic shale plays in favor of the deepwater, on Tuesday reversed course, agreeing to pay a total of $4.3 billion to acquire Atlas Energy Inc.'s million-acre-plus U.S. shale leasehold.
Atlas, based in Pittsburgh, has close to 486,000 net acres in the Marcellus Shale. It also holds an estimated 623,000 acres in the Utica Shale, as well as close to 370,000 acres in Michigan in the Antrim Shale (270,000 acres) and the Collingwood/Utica play (100,000 acres) (see Daily GPI, May 10). In addition Atlas has about 120,000 acres in the Chattanooga Shale of Tennessee and 123,000 acres in the New Albany Shale in Ohio.
Chevron would gain Atlas' joint venture (JV) partnership in the Marcellus play that was put together earlier this year with India's Reliance Industries Ltd. and assume the role of operator with 60% participation under the original agreement terms (see Daily GPI, April 23; April 12). Reliance would continue to fund 75% of the operator's drilling costs, up to $1.4 billion.
A 49% interest in Laurel Mountain Midstream LLC, a JV with The Williams Cos., also is part of the transaction. The partners own more than 1,000 miles of intrastate and natural gas gathering lines servicing the Marcellus (see Daily GPI, June 3, 2009).
"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."
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. In comparison ExxonMobil acquired 45 Tcfe in its $43 billion acquisition of XTO earlier this year (see Daily GPI, June 28).
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.
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."
Just a few weeks ago during an earnings conference call with financial analysts, CFO Pat Yarrington was asked why Chevron had not tried to buy any domestic shale acreage like its peers ExxonMobil Corp. and Royal Dutch Shell plc (see Daily GPI, Nov. 1) had done.
"We're not opposed to shale because it's shale gas," Yarrington told analysts at the end of October. "I think we have expressed that and we are picking up acreage in Canada, Poland and Romania."
However, Chevron would want to find a "cost-effective entry point" to buy domestic shale assets and "we have not found that to be the case in the U.S. market...That's not to say that it will never be the case, but not right now."
Yarrington said there is "a lot of spread between the quality of shale properties, which is important for the asset quality that you are acquiring."
Gary Luquette, president of the oil major's North America Exploration and Production unit, said the Atlas acquisition "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 its partnership for $403 million. It 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 will boost Atlas' stake in AHD to 81%, but once the transaction is completed the pipeline partnership would no longer be controlled by Atlas.
FBR Capital Markets analysts Rehan Rashid and Saurabh Lele calculated what Chevron actually would receive in the deal. Among other things they said Chevron would acquire 180,000 net acres within the liquids-rich southwestern Pennsylvania area, about $1 billion of present value in carry from the Reliance JV, as well as the Laurel Mountain midstream JV.
"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, the FBR Capital analysts estimated.
"We believe the transaction was a statement on Marcellus acreage and a cheap call option on natural gas price recovery," said the FBR Capital analysts. "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 last year of shale powerhouse XTO Energy Inc. (see Daily GPI, Dec. 15, 2009).
"People have been livid with Exxon ever since it bought XTO Energy for a huge amount of money -- $31 billion -- 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."