This is a very encouraging sign for Beach, the fact that French energy giant Total has moved into shale gas.
Seeing as how Beach is an early mover into this space, Total's move is every indication that Beach is playing its cards right.
Good stock price move by Beach, might be that the market is finally valuing its strategy.
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SHAWN McCARTHY
OTTAWA From Tuesday's Globe and Mail Published on Tuesday, Jan. 05, 2010 12:00AM EST Last updated on Tuesday, Jan. 05, 2010 2:45AM EST
GLOBAL ENERGY REPORTER
French-based Total SA has become the latest international oil giant to place its bet on shale gas, agreeing to pay $2.25-billion (U.S.) for a minority interest in Chesapeake Energy Corp.'s Barnett shale assets in Texas.
Total, which has little exposure to North American gas plays, said it is making a strategic investment in the booming U.S. shale business by partnering with Chesapeake, an Oklahoma City-based independent that is the world's largest shale gas operator.
The French multinational has joined a growing roster of international oil companies to invest in shale gas development, which had previously been the preserve of independents.
The development of the deep, tightly bound gas fields has revolutionized the natural gas business in North America, adding huge volumes needed to offset the declining conventional gas fields.
The valuations now being paid for shale gas assets suggest the majors believe in the long-term future of the sector, and believe that currently depressed commodity prices will climb to more profitable levels over the medium term.
Chesapeake will receive $800-million at closing to reduce debt, and use the additional $1.45-billion to finance 60 per cent of its exploration and development work in the Barnett region in Texas to the end of 2012. Chesapeake has done similar joint-venture deals in the past with Plains Exploration & Production Co., BP PLC, and StatoilHydro ASA.
The Total purchase comes just weeks after Exxon Mobil Corp. signalled its commitment to North American shale developments by agreeing to pay $31-billion for XTO Corp., one of the U.S.'s top 10 gas producers with assets in all the major shale gas plays.
"Companies, both domestic and overseas, are interested in getting into shale gas opportunities in the U.S.," said Pavel Molchanov, Houston-based analyst with Raymond James Ltd.
"The economics of natural gas in North America right now is pretty poor, but these companies are getting into these assets from a long-term, strategic perspective."
Mr. Molchanov said Total and Exxon paid an estimated $3 per thousand cubic feet (mcf) of proven natural gas reserves, and require prices of roughly $7 per mcf to earn a competitive return on investment. Natural gas contracts were trading at $5.85 per mcf yesterday but dropped as low as $3 per mcf last fall. Raymond James forecasts prices will average $5 in 2010 and 2011.
Total's investment gives it a 25-per-cent interest in assets that include 700 million cubic feet per day of production, three trillion cubic feet of proved reserves, and 250,000 net acres in the Barnett area.
Total's entry into the shale gas business is small beer compared with Exxon's $31-billion acquisition, but represents a strategic foothold in a critical, unconventional energy play.
"This joint venture will provide us with a solid position in an attractive long-term resource base under competitive terms," Total chief executive officer Christophe de Margerie said in a statement.
"It will allow Total to develop its expertise in unconventional hydrocarbons in order to expand its unconventional business worldwide."
While the U.S. and Canada have developed huge reserves in unconventional shale gas, other countries have only begun to tap natural gas deposits that have become commercially accessible as a result of technological advances.
Other international oil companies, including BP and Royal Dutch Shell PLC, are expected to look for acquisitions among independent shale producers, given the relatively low prices that dogged gas producers in the last year.
"If I were looking to get in, it would be a good time to be a buyer because prices are on the low side," said Phil Weiss, an analyst with Argus Research Group. "So I think it is a little opportunistic to be buying now."
Mr. Weiss expects gas demand to pick up, and conventional production to continue to decline, so that prices should begin to climb in 2011.
As a result of low commodity prices in 2009, independents such as Chesapeake are having to sell assets - and forego some of that future growth opportunity - to repair the balance sheets and cover capital expenditures.
BPT Price at posting:
$1.00 Sentiment: LT Buy Disclosure: Held
(20min delay)