BHP Billiton Ltd. made its first move into unconventional natural gas in the United States on Monday, snagging a slice of one of the country's largest gas fields in a multi-billion dollar deal.
The company has agreed to fork over $4.75-billion (U.S.) for Chesapeake Energy Corp. 's stake in the Fayetteville shale. In doing so, Chesapeake is bowing out of that prolific zone in order to reduce debt.
The deal gives BHP, a global mining giant, a win after its proposed $40-billion takeover attempt of Potash Corp. of Saskatchewan was rejected by the Canadian government in November, and after its proposed iron ore joint venture with Rio Tinto could not overcome regulatory hurdles in October. It plans to pay for the deal using some of the $16-billion war chest of cash it has in the bank.
Major energy companies have been making moves in unconventional natural gas plays, buying themselves decades worth of production at a time when low gas prices have made it difficult for smaller companies to survive or extract all the energy under their control on their own. The transaction will make BHP the second-largest player in the Fayetteville shale, the company said.
The asset purchase "will immediately make BHP Billiton a major North American shale gas producer," Michael Yeager, the head of BHP's petroleum division, said in a statement. "It provides access to a competitive, long-life resource basin that benefits from our ability to invest through the economic cycles."
The sale includes 487,000 acres of shale natural gas properties in Arkansas, as well infrastructure such as pipelines. The Chesapeake assets produce about 415 million cubic feet of natural gas equivalent per day, and will put an additional 10 trillion cubic feet of natural gas under BHP's control. This will jack up its net reserve and resource base by 45 per cent, the company said.
Chesapeake will provide "essential services" for up to one year as Australia's BHP takes over the property, the Oklahoma City-based company said. Producers use multiple horizontal fractures to extract natural gas out of shale rocks, a relatively new technique that has opened up new oil and gas plays. "Longer term, the expertise we gain here will be usable elsewhere as we continue to grow our business," BHP's Mr. Yeager said.
Chesapeake, faced with debt and operating in fields that require plenty of cash, in October struck a $1.1-billion joint partnership with China National Offshore Oil Corp. on some of its energy properties in Texas.
Chesapeake was advised by Jefferies & Company, Inc., while Scotia Waterous worked for BHP.
While Chesapeake is getting out of the Fayetteville play, it still operates and holds positions in four of North America's most celebrated shale natural gas fields: the Haynesville, Bossier, Barnett, and Marcellus.
Further, a string of recent announcements highlight how difficult it is to produce natural gas in shale rocks unless companies have strong balance sheets or rich partners. Nexen Inc. last week said it was looking for partners for its shale assets, Encana Corp. two weeks ago struck at $5.4-billion joint venture deal with PetroChina Co. Ltd., and Talisman Energy Inc. in December made a $1-billion deal with South Africa's Sasol to develop natural gas in the Montney.
BHP also announced an "off-market tender buyback" of shares worth $5-billion (Australian).
Carrie Tait