Total in $2 billion shale gas tie-up with Chesapeake

PARIS/LONDON Mon Jan 4, 2010 8:40pm GMT

A close-up picture of a fuel pump at a Total gas station in Vincennes near Paris May 20, 2005. REUTERS/Charles Platiau

A close-up picture of a fuel pump at a Total gas station in Vincennes near Paris May 20, 2005.

Credit: Reuters/Charles Platiau

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PARIS/LONDON (Reuters) - France's Total signed a $2.25 billion tie-up with Chesapeake Energy, becoming the latest international oil company to take advantage of low gas prices to snap up shale gas assets.

Total said it would take a 25 percent stake in Chesapeake's Barnett Shale gas fields in north Texas, paying $800 million in cash and providing $1.45 billion toward the fields' development over up to six years.

Analysts said the deal made strategic sense for France's largest company by market value and that the price was in line with recent transactions.

"The deal highlights a disciplined approach to capital allocation and that M&A focus at Total remains more toward smaller 'bolt-on' asset acquisitions, as opposed to larger corporate deals," Morgan Stanley said in a research note.

Chesapeake shares were up $1.94 or 7.5 percent at $27.82 on the New York Stock Exchange on Monday. Total's shares closed 1.8 percent higher at 45.795 euros.

The deal follows similar investments by U.S. and European rivals in North American shale gas, which is harder and more expensive to extract than gas from traditional reservoirs.

The drilling techniques needed to produce natural gas from shale were pioneered in the Barnett Shale in the early 1980s.

The Barnett Shale is the largest producing field in North America, but because of its development and age, some believe it is nearing peak production. This contrasts with newer formations like the Marcellus Shale in the Eastern United States, which is still in the early stages of development.

Chesapeake has made similar tie-ups with BP and Statoil in the past 18 months, while in December, the United States' largest oil and gas company, Exxon Mobil, agreed to buy shale gas producer XTO Energy Inc for about $30 billion.

The investments are spurred by confidence that growing demand for energy will boost gas prices from their current depressed levels, ensuring fat margins.

While U.S. natural gas prices have recovered somewhat from 7-1/2 year lows, heavy supplies and weak demand are still a burden. In 2009, the average price for gas at the benchmark Henry Hub delivery point tumbled 55 percent to $3.99 per million British thermal units.

Western companies are also looking closer to home for investments, as barriers to investment in resource-rich countries such as Russia, Saudi Arabia limit their options.

The latest deal also puts Chesapeake -- which has suffered liquidity issues in the past -- on firmer financial footing, allowing the Oklahoma City, Oklahoma, company to lower its net debt to capital ratio and capital commitments, analysts said.

NEW RESERVES

The deal will give Total additional production of 30,000 barrels of oil equivalent per day of gas, and reserves of 130 million barrels of oil equivalent, with the possibility that additional drilling could prove up reserves twice this size.

Total is paying about $3 per thousand cubic feet equivalent (Mcfe) for proved reserves in its deal with Chesapeake, up from the $2.84 per Mcfe that Exxon paid for proved reserves in its deal to buy XTO, according to data from energy research firm Simmons & Co International.

Total said entry into the shale gas business would help Total develop expertise, which could be used in developing unconventional gas reserves internationally and help it expand its position more broadly in the U.S. natural gas market.

However, shale gas production is facing growing scrutiny from regulators and tougher opposition from environmentalists, who say the fluids used to crack open gas-rich rocks can contaminate ground water.

Last week, the U.S. Environmental Protection Agency said it had "serious reservations" about allowing gas drilling in New York City's watershed, warning of a threat to drinking water.

About 60 environmentalists and elected officials rallied on the steps of New York's City Hall on Monday, demanding the state withdraw its plan to allow shale drilling in the city's watershed until more studies are completed.

Total said it was conscious of the environmental risks but that it had confidence in Chesapeake's capacity to manage these.

Under the terms of the deal, Total will fund 60 percent of Chesapeake's share of drilling and completion expenditures until the end of 2012, Chesapeake said in a statement.

In a conference call, Chesapeake Chief Executive Officer Aubrey McClendon said he may strike a similar deal with Total in the Eagle Ford Shale in south Texas, but he cautioned that play is still in the early stages of development.

(Reporting by Marcel Michelson, with additional reporting by Anna Driver in Houston and Dan Trotta in New York; Editing by James Regan, John Stonestreet and Matthew Lewis)

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