PARIS/LONDON, Jan 4 - France's Total (TOTF.PA)
signed a $2.25 billion tie-up with Chesapeake Energy (CHK.N),
becoming the latest international oil company to take advantage
of low gas prices to snap up shale gas assets. Total said it would take a 25 percent stake in Chesapeake's
Barnett Shale gas fields in north Texas, paying $800 million in
cash and providing $1.45 billion toward the fields' development
over up to six years. Analysts said the deal made strategic sense for France's
largest company by market value and that the price was in line
with recent transactions. "The deal highlights a disciplined approach to capital
allocation and that M&A focus at Total remains more toward
smaller 'bolt-on' asset acquisitions, as opposed to larger
corporate deals," Morgan Stanley said in a research note. Chesapeake shares were up $1.94 or 7.5 percent at $27.82 on
the New York Stock Exchange on Monday. Total's shares closed
1.8 percent higher at 45.795 euros. The deal follows similar investments by U.S. and European
rivals in North American shale gas, which is harder and more
expensive to extract than gas from traditional reservoirs. The drilling techniques needed to produce natural gas from
shale were pioneered in the Barnett Shale in the early 1980s. The Barnett Shale is the largest producing field in North
America, but because of its development and age, some believe
it is nearing peak production. This contrasts with newer
formations like the Marcellus Shale in the Eastern United
States, which is still in the early stages of development. Chesapeake has made similar tie-ups with BP (BP.L) and
Statoil (STL.OL) in the past 18 months, while in December, the
United States' largest oil and gas company, Exxon Mobil
(XOM.N), agreed to buy shale gas producer XTO Energy Inc
(XTO.N) for about $30 billion. The investments are spurred by confidence that growing
demand for energy will boost gas prices from their current
depressed levels, ensuring fat margins. While U.S. natural gas prices have recovered somewhat from
7-1/2 year lows, heavy supplies and weak demand are still a
burden. In 2009, the average price for gas at the benchmark
Henry Hub delivery point tumbled 55 percent to $3.99 per
million British thermal units. [ID:nN30196245] Western companies are also looking closer to home for
investments, as barriers to investment in resource-rich
countries such as Russia, Saudi Arabia limit their options. The latest deal also puts Chesapeake -- which has suffered
liquidity issues in the past -- on firmer financial footing,
allowing the the Oklahoma City, Oklahoma, company to lower its
net debt to capital ratio and capital commitments, analysts
said. NEW RESERVES The deal will give Total additional production of 30,000
barrels of oil equivalent per day of gas, and reserves of 130
million barrels of oil equivalent, with the possibility that
additional drilling could prove up reserves twice this size. Total is paying about $3 per thousand cubic feet equivalent
(Mcfe) for proved reserves in its deal with Chesapeake, up from
the $2.84 per Mcfe that Exxon paid for proved reserves in its
deal to buy XTO, according to data from energy research firm
Simmons & Co International. Total said entry into the shale gas business would help
Total develop expertise, which could be used in developing
unconventional gas reserves internationally and help it expand
its position more broadly in the U.S. natural gas market. However, shale gas production is facing growing scrutiny
from regulators and tougher opposition from environmentalists,
who say the fluids used to crack open gas-rich rocks can
contaminate ground water. Last week, the U.S. Environmental Protection Agency said it
had "serious reservations" about allowing gas drilling in New
York City's watershed, warning of a threat to drinking water. About 60 environmentalists and elected officials rallied on
the steps of New York's City Hall on Monday, demanding the
state withdraw its plan to allow shale drilling in the city's
watershed until more studies are completed. Total said it was conscious of the environmental risks but
that it had confidence in Chesapeake's capacity to manage
these. Under the terms of the deal, Total will fund 60 percent of
Chesapeake's share of drilling and completion expenditures
until the end of 2012, Chesapeake said in a statement. In a conference call, Chesapeake Chief Executive Officer
Aubrey McClendon said he may strike a similar deal with Total
in the Eagle Ford Shale in south Texas, but he cautioned that
play is still in the early stages of development.
signed a $2.25 billion tie-up with Chesapeake Energy (CHK.N),
becoming the latest international oil company to take advantage
of low gas prices to snap up shale gas assets. Total said it would take a 25 percent stake in Chesapeake's
Barnett Shale gas fields in north Texas, paying $800 million in
cash and providing $1.45 billion toward the fields' development
over up to six years. Analysts said the deal made strategic sense for France's
largest company by market value and that the price was in line
with recent transactions. "The deal highlights a disciplined approach to capital
allocation and that M&A focus at Total remains more toward
smaller 'bolt-on' asset acquisitions, as opposed to larger
corporate deals," Morgan Stanley said in a research note. Chesapeake shares were up $1.94 or 7.5 percent at $27.82 on
the New York Stock Exchange on Monday. Total's shares closed
1.8 percent higher at 45.795 euros. The deal follows similar investments by U.S. and European
rivals in North American shale gas, which is harder and more
expensive to extract than gas from traditional reservoirs. The drilling techniques needed to produce natural gas from
shale were pioneered in the Barnett Shale in the early 1980s. The Barnett Shale is the largest producing field in North
America, but because of its development and age, some believe
it is nearing peak production. This contrasts with newer
formations like the Marcellus Shale in the Eastern United
States, which is still in the early stages of development. Chesapeake has made similar tie-ups with BP (BP.L) and
Statoil (STL.OL) in the past 18 months, while in December, the
United States' largest oil and gas company, Exxon Mobil
(XOM.N), agreed to buy shale gas producer XTO Energy Inc
(XTO.N) for about $30 billion. The investments are spurred by confidence that growing
demand for energy will boost gas prices from their current
depressed levels, ensuring fat margins. While U.S. natural gas prices have recovered somewhat from
7-1/2 year lows, heavy supplies and weak demand are still a
burden. In 2009, the average price for gas at the benchmark
Henry Hub delivery point tumbled 55 percent to $3.99 per
million British thermal units. [ID:nN30196245] Western companies are also looking closer to home for
investments, as barriers to investment in resource-rich
countries such as Russia, Saudi Arabia limit their options. The latest deal also puts Chesapeake -- which has suffered
liquidity issues in the past -- on firmer financial footing,
allowing the the Oklahoma City, Oklahoma, company to lower its
net debt to capital ratio and capital commitments, analysts
said. NEW RESERVES The deal will give Total additional production of 30,000
barrels of oil equivalent per day of gas, and reserves of 130
million barrels of oil equivalent, with the possibility that
additional drilling could prove up reserves twice this size. Total is paying about $3 per thousand cubic feet equivalent
(Mcfe) for proved reserves in its deal with Chesapeake, up from
the $2.84 per Mcfe that Exxon paid for proved reserves in its
deal to buy XTO, according to data from energy research firm
Simmons & Co International. Total said entry into the shale gas business would help
Total develop expertise, which could be used in developing
unconventional gas reserves internationally and help it expand
its position more broadly in the U.S. natural gas market. However, shale gas production is facing growing scrutiny
from regulators and tougher opposition from environmentalists,
who say the fluids used to crack open gas-rich rocks can
contaminate ground water. Last week, the U.S. Environmental Protection Agency said it
had "serious reservations" about allowing gas drilling in New
York City's watershed, warning of a threat to drinking water. About 60 environmentalists and elected officials rallied on
the steps of New York's City Hall on Monday, demanding the
state withdraw its plan to allow shale drilling in the city's
watershed until more studies are completed. Total said it was conscious of the environmental risks but
that it had confidence in Chesapeake's capacity to manage
these. Under the terms of the deal, Total will fund 60 percent of
Chesapeake's share of drilling and completion expenditures
until the end of 2012, Chesapeake said in a statement. In a conference call, Chesapeake Chief Executive Officer
Aubrey McClendon said he may strike a similar deal with Total
in the Eagle Ford Shale in south Texas, but he cautioned that
play is still in the early stages of development.
