BHP sells Fayetteville Shale assets for $300 million to Texas energy firm

After nearly three years of hand-wringing over the declining value of the Fayetteville Shale play, Australian multinational BHP Billiton Ltd. sold off the Arkansas natural gas development and its other U.S. shales assets for $10.8 billion in cash, company officials announced Thursday (July 26).

In one part of the deal, BHP said MMGJ Hugoton III has agreed to acquire 100% of the Australian mining conglomerate’s stake in the company’s Fayetteville Shale assets for an asking prices of $300 million.

MMGJ Hugoton is a limited liability partnership owned by Dallas-based Merit Energy Company, a privately held energy firm that has over 600 employees and more than $2 billion in annual revenue, according to industry sources.

In a separate transaction valued at $10.5 billion, BHP agreed to sell its entire interests in the Eagle Ford, Haynesville and Permian shale basins to BP American Production Company, a wholly owned subsidiary of British oil giant BP Plc.

“Our priority with this transaction is to maximize value and returns to shareholders. In August 2017, we confirmed that we would seek to exit our US shale assets for value. Following a robust and competitive process, we have delivered on that commitment,” said BHP Chief Executive Andrew Mackenzie. “We are pleased that we have agreed to sell all of our shale assets in two simple transactions that provide certainty for shareholders and our employees.

“The sale … is consistent with our long-term plan to continue to simplify and strengthen our portfolio to generate shareholder value and returns for decades to come,” continued Mackenzie, noting that BHP will return the net proceeds from the both sales to shareholders.

The Eagle Ford Shale in south Texas, the Permian Basin in west Texas and New Mexico, and the Haynesville Shale region spread across parts of east Texas, north Louisiana and south Arkansas comprise nearly 526,000 net acres that produced 58.8 million barrels of oil equivalent in 2018, BHP officials said.

The Fayetteville production operation in north central Arkansas includes nearly 268,000 net acres and has produced 79.9 billion cubic feet of gas this year. However, the $300 million price tag for BHP’s leasehold position in the once-prosperous Arkansas natural gas play is a far cry from the substantially higher asking price that some Wall Street analysts had projected earlier this year.

“By our estimates, combined sales proceeds could top $2 billion, which is significant for a company with $3.8 billion of net debt,” said Subash Chandra, managing director and senior oil and gas analyst at New York City-based Guggenheim Securities told Talk Business & Politics in late February.

What is clear from Thursday’s transaction is that the Fayetteville Shale play’s market value has dropped precipitously from four years ago when Southwestern Energy, Exxon Mobil’s XTO Energy and BHP had dozens of drilling rigs in operation in the shale play, making Arkansas the fourth-largest shale gas producer in the U.S. According to U.S. Energy Information Administration (EIA), Arkansas accounted for 2.8 billion cubic feet of natural gas per day, or 9% of U.S. shale gas production at the end of 2013.

BHP’S BIG ARKANSAS BET ENDS IN FAILURE
It was in early 2011 when BHP made its first big bet in the rapidly expanding U.S. onshore shale oil and gas sector, paying $4.75 billion in cash to purchase nearly 487,000 net acres of leasehold and producing natural gas properties in the Fayetteville Shale from Chesapeake Energy Corp.

That deal was followed up by an even larger acquisition when the world’s largest mining giant paid nearly $15 billion to acquire Petrohawk Energy’s operated positions in the Eagle Ford, Haynesville and Permian shale plays. Altogether, those three shale basins covered more than one million net acres in Texas and Louisiana with estimated 2011 net production of approximately 950 million cubic feet equivalent per day.

Following those deals, BHP doubled down on those shale-play bets by announcing a $10.9 billion capital spending program in the U.S., including a plan to spend $800 million to $1 billion annually over the 10 years to develop the Fayetteville Shale and triple production in the unconventional natural gas development in north-central Arkansas.

However, by early 2016, following the collapse of oil prices in the two previous years, BHP’s investment in its U.S. shale properties had gone from boon to bust as natural gas prices fell well below the Australian mining operator’s break-even mark at a flat $3 per million British thermal units (MMBtu) at the Henry Hub.

Those declining natural gas prices led the world’s largest mining company to take a pre-tax impairment charge of nearly $7.2 billion against the carrying value of its onshore U.S. oil and gas assets.

A year later, BHP Billiton spokeswoman Kara McCulloch told Talk Business & Politics that the Australian mining and energy conglomerate’s current budget in the Fayetteville Shale was “nominal,” with no operating rigs in sight and less than 100 employees supporting the company’s operations in the Arkansas natural gas play.

BHP said it expects both deals with Merit Energy and BP to close by the end of October, subject to normal regulatory approvals and conditions.

Based on BHP’s pre-auction inventory of its Fayetteville Shale shales assets for the period ended Dec. 31, new owner Merit Energy will add 1,042 productive wells once its closes on the deal with the Australian mining operator. According to information on the company’s website, the Texas oil and gas company has closed on $8.2 billion in acquisitions since 1989 and has acquired more than 11,000 wells across a 10-state footprint that stretches from Louisiana to Montana.

Talk Business & Politics could not reach company officials for comment.

BHP said it will continue to operate the U.S. oil and gas assets until both deals close, working with the buyers to ensure a smooth transition of ownership. The Melbourne-based global mining giant, which has said it plans to return to its core mining and metal business after the sale, also said it expects to take another $2.8 billion post-tax impairment cost against the carrying value of its U.S. assets at the end of the 2018 financial year.

Earlier this year, Southwestern Energy also revealed plans in the first quarter to put its upstream and midstream natural gas drilling assets in the Fayetteville Shale up for sale, transferring most of its capital investment for 2018 to the company’s “liquids rich” operations in the Appalachian region of the U.S.

The Houston-based oil and gas firm is the top leaseholder in the Fayetteville Shale with a leasehold position of 919,000 acres, followed by Exxon-Mobil’s XTO Energy with property rights to over 730,000 acres in Arkansas. Southwestern is expected to provide an update on its ongoing Fayetteville Shale auction when it reports its second quarter earnings on Aug. 2.