BHP to Buy Chesapeake Shale Gas Assets for $4.75 Billion

BHP Billiton Ltd., the world’s biggest mining company, agreed to buy Chesapeake Energy Corp.’s Arkansas shale gas assets for $4.75 billion in cash, more than doubling its U.S. 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 Melbourne- based BHP’s first foray into U.S. shale gas.

“It’s a bet on long-term U.S. gas prices going higher,” said Prasad Patkar, who helps manage about $1.8 billion including mining stocks at Platypus Asset Management Ltd. 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.”

Chief Executive Officer Marius Kloppers will expand oil and gas reserves by 45 percent with the purchase, BHP’s largest since it bought WMC Resources Ltd. 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 rose 1.6 percent to A$46.58 by the 4:10 p.m. close in Sydney, while the benchmark S&P/ASX 200 Index dropped 0.9 percent. BHP also completed a A$5 billion off-market share buyback today as part of a $10 billion program it revealed on Feb. 16. Chesapeake rose $1.58, or 5.2 percent, to $32.01 at 4:15 p.m. in New York Stock Exchange composite trading.

The Chesapeake transaction helps the company become a “very, very powerful petroleum” producer, with natural gas assets in Western Australia and stakes in U.S. Gulf of Mexico oil projects, Yeager said.

Investor and regulatory concerns sank three investments worth more than $100 billion proposed by Kloppers, 48, 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, S&P 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 U.S. 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 Corp. paid $1.92 per MCF of reserves when it acquired property in the Fayetteville Shale from Petrohawk Energy Corp.

Announced deal premiums this year have been at an average of 24 percent, compared with 19 percent last year.

“The valuation looks full, but not over the top, especially if and when U.S. gas prices start firming again,” Platypus Asset’s Patkar said.

‘Strategic Sense’

Chesapeake, based in Oklahoma City, said Feb. 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 Ltd. 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 percent 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 Corp. agreed to buy Atlas Energy Inc. to add acreage in the gas-rich Marcellus Shale in the U.S. East. Exxon acquired XTO Energy Inc., a shale-gas producer, for $34.8 billion in stock and debt in June.

‘Major Producer’

Cnooc Ltd., 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 gas assets, which include the proposed Browse LNG project led by Woodside Petroleum Ltd. and the Scarborough venture with Exxon Mobil Corp., he said.

“This will do nothing to our Gulf of Mexico focus, nor will it do anything to our WA LNG focus,” he said. “This gives us an instant, credible avenue to go do more of this.”

Chesapeake said Jan. 6 it wanted to cut its debt 25 percent in two years by selling assets, while increasing production by 25 percent. The BHP announcement is a sign that Chesapeake is following through, Bodino said.

“It’s like turning a big tanker in the ocean,” said Bodino, who rates Chesapeake’s shares a “buy” and owns none. “You know it’s going to be a big, wide turn, but once it picks up steam it’s very powerful.”

Barclays Capital and Bank of Nova Scotia are advising BHP on the transaction, and Jefferies Group Inc. is working with Chesapeake.

To contact the reporters on this story: James Paton in Sydney at jpaton4@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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