Chesapeake (CHK) recently raised $2.6 billion in natural gas asset sales in order to make up for this year's weak earnings. As part of the bundle of transactions, Chesapeake , the most active new well driller in the United States, will sell 58,400 acres to Exxon Mobil (XOM). Chesapeake also made a $745 million deal with a subsidiary of Morgan Stanley (MS), which included cash upfront for Chesapeake in exchange for a ten-year production agreement involving natural gas assets located in Oklahoma.
Based on previous research on Chesapeake, I view the company's sale to Exxon as both a debt solution for Chesapeake and a promising investment for Exxon. However, in spite of my view of the transaction, Exxon continues to express serious interest in the possibilities of natural gas as an alternative fuel.
Exxon's purchase from Chesapeake is an extension of its 2009 acquisition of the natural gas company XTO Energy. In that transaction, Exxon acquired $10 billion of XTO's debt in order to expand natural gas development. Traditionally, energy companies extracted natural gas by drilling vertical wells into pockets of methane above underground oil deposits. Previous methods of extracting natural gas burned off methane as a waste product.
However, over the course of twenty years, horizontal well drilling replaced vertical well drilling for natural gas development. The horizontal wells are fractured by a high-pressure water drilling process known as "fracking." Horizontal well drilling exposed new sources of natural gas in unexplored oil lands in the United States. As a result of new oil field expansion, Exxon seized the new profit opportunity through the XTO acquisition and its recent purchase from Chesapeake.
Exxon's recent business deals indicate a continuing interest in natural gas production from major companies that traditionally focus on crude oil. Natural gas prices currently sit at noticeable lows when compared to crude oil prices. Additionally, natural gas recently garnered newfound attention as a popular fuel source for vehicles due to increasing media coverage.
For example, one media commentator noted in an online article that the trucking industry could save money by using natural gas. The same article noted that buses and other modes of public transit in cities use a form of natural gas fuel cells that were an inexpensive and environmentally-sound fuel source. The author suggested that natural gas was also being implemented into cars after mentioning that the car rental company Hertz introduced ten cars that used compressed natural gas (CNG) at its Oklahoma City airport facility.
I believe that Exxon recognized the potential for natural gas development in the United States in its recent purchase from Chesapeake. Consumer backlash from rising gas prices and negative public perception of U.S. foreign oil dependency sources probably directed Exxon to consider natural fuel sources within the United States. Speculations aside, Exxon proved that it is seriously invested in developing natural gas as a staple fuel source within the US. The company increased domestic natural gas production and recently pledged to invest $37 billion in natural gas production within the year.
In fact, Exxon proved its commitment to natural gas drilling in the United States through an unlikely partnership with three rival oil companies. In March, Exxon announced that it will partner with BP (BP), ConocoPhillips (COP), and TransCanada (TRP) as part of the Alaska Pipeline Project to develop natural gas production in Alaska. The companies plan to develop the North Slope of Alaska's natural gas resource land to meet global fuel demand by producing large-scale liquefied natural gas (LNG) exports from south-central Alaska. The Wall Street Journal blog post stated that the fuel company partnership hoped that the Alaska natural gas project will serve as an alternative to a natural gas pipeline through Alberta, Canada.
However, Exxon is not the only company expanding its natural gas production options. Devon Energy (DVN) recently announced that it will continue oil and natural gas production in the Barnett Shale region of Texas. The company also stated that it would increase production from the area over the next five years. Devon's announcement followed its plan to spend $950 to drill 300 wells into the Barnett Shale in 2012. Additionally, rival energy company Marathon (MRO) seeks to participate in the push for natural gas drilling in foreign markets. Marathon reportedly has 1.2 million net acres of land in Poland, some of which has shale gas potential.
Nevertheless, some analysts are skeptical about Exxon's commitment to natural gas development. One online analyst stated that Exxon should not expand its natural gas drilling operations, while Chesapeake decreased its natural gas output. It stated that Exxon's business decisions in terms of natural gas will not lead to a steady increase in stock value, since the company may underperform on actual output.
Additionally, another analyst stated that investing in Chesapeake will not be wise in the near future. According to the analyst, any investment in Chesapeake will be associated with the company's major debt (in spite of the recent multi-billion-dollar deals with major oil companies). This viewpoint makes a point for not investing in either company.
However, I feel that investing in Chesapeake will have more long-term benefits in the future. Major auto manufacturers will recognize the strong interest in natural fuel and implement fuel cell technology in more vehicles.
Based on recent increased interest on natural gas development, some analysts state that Chesapeake's recent sale to Exxon is a low-cost opportunity to invest in the natural gas company. I agree with this perspective based on growing public concern over increases in crude oil prices and possible fuel shortages in the future.
Current natural gas prices are considerably low compared to crude oil prices because of recent expansions of natural gas sources within the North American continent. Natural gas sources have a surplus that is not directly impacted by global conflict like crude oil. For now, at least until prices rise from new drilling ventures to meet demand, natural gas is a plentiful, relatively cost-effective fuel source.
Oil companies investing in natural oil production see past the immediate future. The companies recognize that many mass transit and personal vehicles now operate on natural gas fuel cells. Oil companies invest in natural gas now in order to adapt to the possibility that many mainstream personal vehicle companies will create more cars utilizing this technology. In spite of the previously-stated concern over Chesapeake's major company debt associated with its stock, an investment in a natural gas company like Chesapeake will pay off in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.