In the news today. Shale gas will be the flavor of the year 2011.
BHP enters US shale gas with $4.7b deal
On Tuesday 22 February 2011, 16:57 BHP Billiton Ltd has entered the booming United States shale gas business with the $US4.75 billion ($A4.71 billion) purchase of assets in Arkansas.
The deal will immediately make BHP Billiton a major North American shale gas producer and boost its net reserve and resource base by 45 per cent.
The acquisition is the first major deal by the mining giant since its failed $US40 billion takeover bid for Potash Corporation of Canada in November last year.
The move was consistent with BHP Billiton's strategy of investing in large, long-life, low-cost assets with significant volume growth from future development, BHP Billiton said.
"It also supports our goal of diversification by geography, customer and product," the miner said.
BHP Billiton said it had agreed to buy all of Chesapeake Energy Corp's interest in the Fayetteville shale field, including the field's mid-stream pipeline system, funded from cash resources.
The assets include about 487,000 acres of leasehold and producing natural gas properties, yielding more than 400 million cubic feet of gas per day.
They were "the second largest position in one of the largest gas fields in the world", BHP Billiton said.
"This acquisition will increase BHP Billiton's net reserve and resource base by 45 per cent," it said.
"The assets acquired generate strong margins and returns on capital at today's prices."
BHP Billiton said it would become the operator of Chesapeake's operated interests in the field.
Michael Yeager, chief executive of BHP Billiton Petroleum, said the onshore assets were world-class.
"This transaction marks BHP Billiton's entry into the US shale gas business," Mr Yeager said.
"The operated position we are obtaining will immediately make BHP Billiton a major North American shale gas producer.
"It provides access to a competitive, long-life resource basin that benefits from our ability to invest through the economic cycles."
The assets included development options that would support substantially higher production over a 40-year operating life, BHP Billiton said.
"Our understanding is that BHP Billiton believes the production could be increased three-fold given the 10 Tcf (trillion cubic feet) resource and proven reserves of 2.5 Tcf," UBS analysts said.
UBS said Chesapeake's joint venture partner in the Fayetteville shale assets, BP, had paid $US1.9 billion for its 25 per cent interest, which implied an asset value of $US5.7 billion for the 75 per cent stake that BHP Billiton is purchasing.
"Thus it would appear on face value that BHP has purchased the assets at a reasonable price, especially given BHP will assume operatorship," UBS said.
The deal provided an instant boost to the miner's share price and was broadly seen as positive by market commentators.
BHP Billiton shares reached an intraday high of $47.42 before closing at $46.58, up 73 cents, or 1.59 per cent.
UBS said a much larger transaction was expected but the market was likely to be relieved it was a smaller deal.
On face value, the deal looked like it could become much bigger in terms of production scale, UBS said.
"With the US for two years now not allowing coal fired power stations to be built, and (BHP Billiton chief executive) Marius's (Kloppers) view that we will never see a new coal fired power station built in the US, then gas will play an increasing role in the US energy market," the analysts said.
Standard & Poor's Ratings Services said its ratings on BHP Billiton were not immediately affected by the Chesapeake agreement.
BHP Billiton also on Tuesday said it may vary the size of its $US5 billion off-market share buyback.
OBL Price at posting:
2.9¢ Sentiment: Buy Disclosure: Held
(20min delay)