Chesapeake’s Fayetteville Shale sale could tempt Big Oil players

A top Wall Street analyst said Monday (Feb. 7) that Chesapeake’s auction of its Fayetteville shale assets could bring interest from several of the world’s largest oil giants, including ExxonMobil and Royal Dutch Shell.

Earlier today, Oklahoma City-based Chesapeake Energy Corp. announced a strategic decision to sell all of its Fayetteville Shale assets, as well as its equity investments in Frac Tech Holdings and Chaparral Energy Inc. Once complete, the independent oil and gas producer anticipates that the combined pre-tax proceeds from the deal could top $5 billion.

Fadel Gheit, a managing director and senior oil and gas analyst for New York-based Oppenheimer & Co., said in an e-mail response to Talk Business that Fayetteville Shale leader Southwestern Energy is not interested in expanding its presence in the shale.

“But ExxonMobil might,” said Gheit. “Other companies, including Royal Dutch Shell might also be interested.”

ExxonMobil and Royal Dutch Shell (Shell Oil) are the world’s largest publicly traded oil companies with annual revenues of $301 billion and $298 billion, respectively. The two oil giants are also among the world’s largest companies, trailing only Bentonville-based Wal-Mart Stores Inc. with annual revenues of $408.2 billion in fiscal 2009.

Gheit said the billion dollar price tag and the high cost of extracting natural gas from the Arkansas shale rock could eliminate smaller independent oil and gas companies from the Chesapeake bidding process.

“I am not sure, however, any of the independent companies would be interested, or have the money as they all are increasing focus on oil, instead of natural gas,” said Gheit, who was named the “best on the street” analyst by the Wall Street Journal for his research and commentary on the oil and gas industry.

FOREIGN BIDS NOT LIKELY
The Oppenheimer analyst also downplayed industry chatter that the Arkansas shale play could bring interest from foreign bidders, such as China’s CNOOC Limited and Sinopec and Russia’s Lukoil.

“Since this transaction would be a sale, not joint venture, potential buyers must be familiar with shale gas plays, which may exclude foreign companies that are more interested in joint ventures,” he said.

Chesapeake is already involved in two joint ventures with CNOOC in other U.S. shale developments. In October, Chesapeake and CNOOC agreed to a $1.08 billion deal that gave the Chinese oil and gas conglomerate a one-third stake in the Oklahoma driller’s 600,000 net oil and natural gas leasehold acres in the Eagle Ford Shale in South Texas. Last month, Chesapeake signed a similar partnership deal to develop the Niobrara Shale in northeast Colorado and the Power River Basin in southeast Wyoming. Under that agreement, CNOOC will purchase 33.3% undivided interest in Chesapeake’s 800,000 net oil and natural gas leasehold acres in the DJ and Powder River basins.

In return, Chesapeake will receive $570 million in cash at closing, and CNOOC will fund 66.7% of Oklahoma driller’s share of drilling and completion costs until an additional $697 million has been paid by year-end 2014. That transaction is expected to close in the first quarter of 2011.

CHESAPEAKE SHIFT
Meanwhile, Chesapeake has been slowly shifting capital and drilling rigs out of the Fayetteville Shale, where Southwestern has snagged the best leasehold positions and the more lucrative drilling sites.

Last fall, Chesapeake announced it planned to reduce its drilling activity in the Arkansas shale play. In doing so, it lowered its drilling activity from an average of 18 operated rigs in 2009 to eight operated rigs currently and an average of eight operated rigs projected for 2011 and beyond.

At the same time, ExxonMobil has quietly acquired huge stakes in Arkansas’ Arkoma and Fayetteville Shale plays when it purchased Fort Worth-based XTO Energy in late June in an all-stock deal worth $30 billion. The Texas-based oil conglomerate also recently paid $650 million for the Fayetteville Shale assets of Petrohawk Energy Corp., which will be folded into XTO.

Gheit and other Wall Street analysts called last year’s Exxon-XTO deal a "game-changing" moment in the nation’s energy outlook, signaling a shift in the never-ending hunt for oil to new energy sources such as natural gas.

BIG ON GAS
In a televised interview with Bloomberg News in December, Gheit said the ExxonMobil-XTO deal natural was not entirely unexpected. He said major integrated oil giants like Exxon, BP, and Royal Dutch Shell are increasingly on the hunt for premium stakes in natural gas plays.

“I always expected Exxon to do something. It was not a question of if – but when,” Gheit said. “The Exxon-XTO deal makes a lot of sense (because) it gives Exxon something they don’t have enough of — exposure to onshore U.S. natural gas.”

Similarly, Dutch oil giant Shell Oil is also aggressively seeking to buy natural gas companies, particularly those with attractive shale assets. Last summer, the Dutch oil conglomerate paid $4.7 billion in cash for most of the assets of East Resources, one of the largest independent oil and natural gas companies in the U.S. Appalachian Basin.

Until now, Chesapeake, Petrohawk and other smaller independents have been unable to end Southwestern’s stranglehold on the Fayetteville Shale. However, ExxonMobil and Shell Oil, and other major integrated oil giants like Chevron, ConocoPhillips or France-based Total, have enough cash and drilling muscle to turn a profit in the Arkansas shale basin.

FAYETTEVILLE SHALE DOWNTURN?
Arkansas officials and leaseholders are already asking if the Chesapeake sale, low natural prices and fewer drilling rigs mean that the Fayetteville Shale is headed for a downturn.

It is likely, industry experts say, that Chesapeake’s gradual withdrawal from the Arkansas oil and gas industry could mean a loss of capital and jobs. However, if a major player such as ExxonMobil or Shell Oil wins the bidding for Chesapeake’s Fayetteville shale assets, analysts say, their capital investment would easily outstrip Chesapeake’s influence and the Arkansas shale play could instead be headed for another upswing.

Chesapeake officials are expected to quickly conduct the sale of the driller’s Fayetteville Shale assets, and a winning bid could be announced by the end of June.

Chesapeake shares (NYSE CHK) rose more than 4% in Monday trading, up $1.21 at $31.27. During the past 52 weeks, the share price has ranged from a $32.17 high to a $19.62 low.