Home > Mergers & Acquisitions > BHP to Buy Chesapeake Shale Assets

BHP to Buy Chesapeake Shale Assets

February 23, 2011

“BHP Billiton Ltd. said Monday it is acquiring Chesapeake Energy Corp.’s Fayetteville shale gas holdings in Arkansas and some pipeline assets in a deal totaling about $4.75 billion in cash.

Earlier this month, Chesapeake announced plans to sell about 487,000 acres of its Fayetteville shale holdings as part of a plan to reduce its debt by 25% in two years. The deal would increase BHP’s gas reserves and resources by 45%.

This acquisition would mark BHP’s first shale gas asset. The company, primarily a miner, gets about 20% of its profits from oil and gas. Most of its assets are in Australia, the Gulf of Mexico, Algeria and Pakistan. The Arkansas asset would likely supply natural gas mostly to utility companies.”

Source: Wall Street Journal, February 22 2011

Observations:

  • ExxonMobil started a run to acquire shale gas assets in December 2009 by paying $41bln for XTO Energy (incl. taking on $10bln debt). The deal was made contingent on the senate investigation into hydraulic fracturing; the method used to enhance production of gas from shale.
  • BHP pays $1.77/Mcf of proved gas reserves, about 30% below the price paid by ExxonMobil for XTO, but in line with recent other acquisitions in the industry.

Implications:

  • BHP can still expand in the oil and gas industry without triggering the regulatory roadblocks it faces when trying to expand its position in many mined commodities. It would therefore not be unlikely if it makes more acquisitions in the industry. Some analysts critique the diversification of the company, arguing that shareholders have little benefit from the combination of mining and oil/gas in one firm.
  • The natural hedge created by combining mining & oil/gas (benefiting from higher oil/gas prices on the sales side while being hurt at the same time in fuel and electricity prices) does enable the company to promise a steady cash flow to investors.

©2011 | Wilfred Visser | thebusinessofmining.com

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