BHP Billiton, the world’s biggest mining company, agreed to buy Chesapeake Energy’s Arkansas shale gas assets for $4.75 billion in cash, more than doubling its US oil and gas reserves.
BHP will add more than 10 trillion cubic feet of gas resources through the purchase, J Michael Yeager, chief executive officer of BHP’s petroleum division, said on a call with reporters today. The Fayetteville deal marks BHP’s first foray into US shale gas.
“It’s a bet on long-term US gas prices going higher,” said Prasad Patkar, who helps manage about $1.8 billion including mining stocks at Platypus Asset Management in Sydney. “They’ve entered a new business but have met the criteria that they have articulated for acquisitions, that is, tier-one, low-cost, long-life and expandable assets.”
CEO Marius Kloppers will expand oil and gas reserves by 45 per cent with the purchase, BHP’s largest since it bought WMC Resources for $7.6 billion in 2005. There have been 135 oil and gas deals worth a combined $41 billion announced globally this year, according to data compiled by Bloomberg. The $285.3 billion of transactions last year was the second highest on record, after 2007.
Share prices
BHP declined 0.5 per cent to 2,363 pence by 9.44 am in London trading, the lowest since January 31. The stock rose 1.6 per cent to A$46.58 by the 4.10 pm close in Sydney, while the benchmark S&P/ASX 200 Index dropped 0.9 per cent. BHP also completed a A$5 billion off-market share buyback today as part of a $10 billion programme it revealed on February 16.
The Chesapeake transaction helps the company become a “very, very powerful petroleum” producer, with natural gas assets in Western Australia and stakes in US Gulf of Mexico oil projects, Yeager said.
Investor and regulatory concerns sank three investments worth more than $100 billion proposed by Kloppers in the past four years, including last year’s offer for Potash Corp of Saskatchewan Inc. The failed deals, combined with record first-half profit, left BHP with $16.1 billion of cash on hand.
The company’s “credit profile can accommodate the proposed acquisition and buyback, given the group’s strong cash flow generation and conservative financial profile,” Standard & Poor’s analysts May Zhong and Brenda Wardlaw wrote today in a report. BHP’s credit rating of “A+” isn’t immediately affected by the acquisition, it said.
BHP’s reserves
Chesapeake agreed to sell all of its interests in about 487,000 net acres of properties in central Arkansas, the company said. Shale formations consist of dense rock that can be broken apart to release oil and gas. The transaction is expected to close in the first half of this year, Chesapeake said.
Fayetteville holds about 2.4 trillion cubic feet of gas, equivalent to 456 million barrels of oil, compared with BHP’s total proved US reserves of 288 million barrels in its 2010 annual petroleum review.
BHP, Australia’s largest oil and gas company, paid about $1.98 for each thousand cubic feet of estimated proven reserves, said Michael Bodino, an analyst at Global Hunter Securities in Fort Worth, Texas. In December, Exxon Mobil paid $1.92 per MCF of reserves when it acquired property in the Fayetteville Shale from Petrohawk Energy.
Announced deal premiums this year have been at an average of 24 per cent, compared with 19 per cent last year.
“The valuation looks full, but not over the top, especially if and when US gas prices start firming again,” Platypus Asset’s Patkar said.
‘Strategic sense’
Chesapeake, based in Oklahoma City, said on February 7 it planned to raise $5 billion this year by selling its Fayetteville shale holdings and its stakes in two companies to reduce debt.
The purchase “makes good strategic sense and is capable of delivering BHP some very good growth and returns over the medium-to-longer term,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital in Melbourne. “The deal is not risking the company, shouldn’t run into regulatory hurdles, and adds another leg for growth within the petroleum division.”
BP Plc paid $1.9 billion for 25 per cent of Chesapeake’s Fayetteville shale in 2008, a month after buying all of the company’s operations in the Woodford Shale of Oklahoma’s Arkoma Basin for $1.75 billion.
Chevron agreed to buy Atlas Energy to add acreage in the gas-rich Marcellus Shale in the US East. Exxon acquired XTO Energy, a shale-gas producer, for $34.8 billion in stock and debt in June.
‘Major producer’
Cnooc, China’s largest offshore energy producer, in January agreed to pay $570 million in cash for a one-third stake in Chesapeake’s Niobrara shale project in Colorado and Wyoming.
BHP will take over the running of the asset through the purchase, which also includes pipelines, and plans to spend as much as $1 billion a year developing shale resources, Yeager said on the call.
BHP expects to invest as much as $30 billion developing Western Australian (WA) gas assets, which include the proposed Browse LNG project led by Woodside Petroleum and the Scarborough venture with Exxon Mobil, he said.
