British Petroleum Moves into Arkansas with Chesapeake Energy Shale Purchase

The second largest oil company in the European Union, British Petroleum (NYSE: BP), has announced that it has entered into an agreement to purchase 25% of Chesapeake Energy's (NYSE: CHK) Fayetteville, Arkansas shale joint venture. British Petroleum is spending $1.9 billion dollars for the interest.

Of the $1.9 billion dollar price tag, $800 million will be paid by BP as they fund the drilling and development costs for Chesapeake's share of the venture through 2009. This maneuver adds 135,000 acres of rich shale deposit acreage to BP's US holdings. The Fayetteville properties are producing natural gas. Sharp appreciation in the price of natural gas has made it very worthwhile to pursue shale production fields which can be fairly expensive to develop.

When BP's 25% share is combined with the remainder of the field, total production is 180 million barrels per day equivalent of natural gas. The companies believe this production could be greatly expanded with the additional of as many as 6,700 new horizontal wells which could be added to the property.

BP Chief Executive of Exploration and Production, Andy Inglis, stated,

"Together with our substantial position in the emerging Haynesville Shale play in East Texas, BP has made a strategic entry into three top tier shale plays in North America and established potential shale resources of 1 billion barrels oil equivalent net to BP."

This is the third acquisition of shale resources by British Petroleum in recent months. With T. Boone Pickens calling for the conversion of US cars and trucks to natural gas, British Petroleum is making a strong play in gas reserves in the US. With or without the conversion of automobiles to use natural gas instead of gasoline, the market for natural gas remains very strong. Natural Gas prices have risen at a faster clip than oil during the year so far.

British Petroleum was trading very near its 52 week low at a Friday close of $57.63. This comes as the share price has fallen steadily since May. With an 84 cent per share dividend for the most recent quarter, BP offers an annualized yield of over 5.8% at the current prices.

Disclosure: None

Comments

[WEBISKING:]

If but CHesapeake when CEO Mcclendon does but 10% cheaper you will do fine

2008 Sep 03 04:22 PM

[AEB:]

Why is it that analysts never ask the question, "Will this make any money?" Why is it assume that if a big company like BP thinks this is a good idea, it must be a good idea. Has anyone ever been to a party late? There's not much opportunity there, just cost.

Why do you think that Chesapeake is selling everything in sight? Because shale gas makes no economic sense whatsoever at less that $9.00/MMBtu wellhead price (for all the analyst types that no nothing about the oil and gas business, that means after transportation and processing costs, often $1.50/MMBtu).

Shale.com is the biggest scam since Subprime.com. When the music stops (as it has in the Barnett Shale), only the shareholder will lose...again.

2008 Sep 03 09:39 PM

[Paul Killinger:]

Gee, does that mean the U.S. has TOO MUCH NG? Why, that's going to be TERRIBLE for consumers and our economy, especially once it gains a foothold as a replacement for oil as a transportation fuel.

2008 Sep 04 08:48 AM

[Mmarrkk:]

AEB: shale gas makes lots of sense (and cents!) at far less than $9/mmBTU. In fact, I'd say certain areas make sense at $5 (some Barnett and the Fayetteville) and others make sense at $7 (rest of Barnett, Haynesville, some Marcellus and several others that are not being hyped in the media...they are "tight" and won't be PR'd for a while).

Why is CHK selling "everything in sight?"? If you'd look you'd see they aren't selling everything. In many of their best plays, they are selling 25%, plus getting someone to pay for drilling costs on teh other 75%! The reason they have to do this is that they have gone out and 'captured' a huge amount of mineral leases over hundreds of thousands of acres. These leases are generally 3 year leases with 2 year extension options so all of this land has to be drilled in 5 years or less. To do this would take unbelievable amounts of capital. CHK could either borrow the money which really isn't a great option giving theri current debt, or sell PARTS of them and get someone else to pay for huge portions of the costs. Its called LEVERAGE and Aubrey's got a ton of it!!

CHK has forward sold a large portion of its gas at prices well north of even your supposed $9 minimum price and has floors in place for a good portion of the rest. So they have eliminated a big chunk of the price risk. They went out and bought drilling rigs when they were cheap so they partially took out the cost inflation risk, although there's still a sizeable risk for that.

BP is a company run by some very smart financial minds...maybe not operations, but they know finances. For them to make this investment, I can guarantee you the numbers work, even with the leverage they had to give up to CHK.

2008 Sep 04 09:11 AM