Cnooc Pays $570 Million for Chesapeake Shale Stake

Cnooc Ltd., China’s largest offshore energy producer, agreed to pay $570 million in cash for a one- third stake in Chesapeake Energy Corp.’s Niobrara shale project, adding to its U.S. holdings in crude oil production.

The Chinese explorer also agreed to pay as much as $697 million, up to two-thirds of Chesapeake’s costs to drill and complete wells in the area, the companies said in a statement yesterday.

The deal follows Chinese President Hu Jintao’s first state visit to the U.S. this month to expand economic ties and would be Cnooc’s second U.S. energy asset purchase from Chesapeake, five years after political opposition derailed its $18.5 billion bid for Unocal Corp. The company will pay about $2,140 an acre for its stake in Niobrara and has the right to a one-third share in future acquisitions in the shale formation.

“If you look at President Hu’s recent trip to Washington, there seems to be a greater willingness in the U.S. to encourage Chinese investment,” said Wang Aochao, head of China energy research at UOB-Kay Hian Ltd. in Shanghai. “We don’t have all the details at hand, but it appears to be a fair price for these assets. The Chinese oil majors still think valuations generally for oil and gas assets are reasonable.”

Photographer: Nelson Ching/Bloomberg

The headquarters of Cnooc Ltd. in Beijing. Close

The headquarters of Cnooc Ltd. in Beijing.

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Photographer: Nelson Ching/Bloomberg

The headquarters of Cnooc Ltd. in Beijing.

Niobrara covers 8,400 square miles (21,756 square kilometers) in Colorado and Wyoming and may contain 103.6 million barrels of oil, the U.S. Geological Survey estimated in 2006 before Chesapeake, EOG Resources Inc. and other producers began drilling the formation.

‘Seems Rich’

Cnooc, which is listed in Hong Kong, has risen 54 percent in the past 12 months, outpacing the 16 percent gain in the benchmark Hang Seng Index. The shares fell 0.7 percent to HK$17.20 today. The Hang Seng also declined 0.7 percent.

Chesapeake rose $2.20, or 8.1 percent, to $29.53 at 4:02 p.m. in New York Stock Exchange composite trading, its largest gain in five weeks. Other U.S. oil and gas producers with Niobrara leases also rose, including Petroleum Development Corp. and Andarko Petroleum Corp.

“This price seems rich,” Eric Hagen, an analyst for New York-based Lazard Capital Markets, said in a note today to clients affirming a hold rating on Chesapeake shares. “Cnooc is seeking access to technology more than U.S. assets.”

The Chinese energy explorer forecast a 12 percent increase in oil and gas production in 2011 after spending about $8.4 billion in the past year acquiring assets in the U.S., Africa and Argentina. By contrast, output rose 44 percent in 2010.

Prior Shale Purchase

Cnooc, based in Beijing, completed its $1.08 billion purchase of a one-third interest in Chesapeake’s 600,000 acres in the Eagle Ford project in South Texas in November. The Niobrara deal may be completed in the first quarter of this year, according to yesterday’s statement.

“The win-win deal valuation is fair based on our estimates and Cnooc’s strategy to further expand into the oil-rich shale deposits in the U.S.,” said Gordon Kwan, head of regional energy search at Mirae Asset Securities in Hong Kong. “The total investment of $1.27 billion in the deal through 2014 is manageable and equates to about 14 percent of Cnooc’s budgeted $9 billion for 2011.”

The Niobrara deal will lead to a reduction in U.S. oil imports over time and the creation of thousands of jobs, Aubrey McClendon chief executive officer of Oklahoma City-based Chesapeake, said in the statement.

“This transaction will provide the capital necessary to accelerate drilling of this large domestic oil and natural gas resource,” McClendon added.

Doubling Rigs

Chesapeake expects to double its drilling rigs in Wyoming’s Powder River and Colorado’s Denver-Julesburg basins to 10 by the end of the year. It plans to have 20 rigs working by end-2012.

Chesapeake, the most active U.S. gas and oil driller, has 16 wells producing in those basins with initial output of as much as 1,000 barrels of oil and 3 million cubic feet of natural gas a day, according to the company.

The companies plan to eventually produce the equivalent of as much as 5 billion barrels of oil from the basins.

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; John Duce in Hong Kong at jduce1@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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