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 last week, 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, with 487,000 net acres, is the second largest gas producer in the Fayetteville Shale after Southwestern Energy Co. (see related story).
“This transaction marks BHP Billiton’s entry into the U.S. shale business,” said BHP Billiton Petroleum CEO J. Michael Yeager. “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 NGI, Feb. 14).
Chesapeake CEO Aubrey K. McClendon elaborated on the sale during his company’s quarterly earnings conference call last week (see related story). Earlier this month Chesapeake completed a $570 million cooperation agreement giving a subsidiary of China’s CNOOC Ltd. a one-third interest in 800,000 net acres in the Denver-Julesburg and Powder River basins of the Niobrara Shale (see NGI, Feb. 7). 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 NGI, Sept. 8, 2008).
BHP Billiton Petroleum 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., which included 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 NGI, Jan. 10; Nov. 15, 2010).
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 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 currently is developing potash in Saskatchewan.
For Chesapeake, the transaction was viewed favorably by financial analysts.
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 NGI, Jan. 3).
“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 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.
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