BHP Billiton Ltd., the world’s biggest mining company, agreed to buy Chesapeake Energy Corp.’s Arkansas shale gas assets for $4.75 billion in cash, more than doubling its U.S. oil and gas reserves.

BHP will add more than 10 trillion cubic feet of gas resources through the purchase, J. Michael Yeager, chief executive officer of BHP’s petroleum division, said on a call with reporters today. The Fayetteville deal marks BHP’s first foray into U.S. shale gas.

“It’s a bet on long-term U.S. gas prices going higher,” said Prasad Patkar, who helps manage about $1.8 billion, including mining stocks, at Platypus Asset Management Ltd. in Sydney. “They’ve entered a new business, but have met the criteria that they have articulated for acquisitions, that is, tier-one, low-cost, long-life and expandable assets.”

Chief Executive Officer Marius Kloppers expands total oil and gas reserves by 45 percent with the purchase, BHP’s largest since it bought WMC Resources Ltd. for $7.6 billion in 2005. There have been 133 oil and gas deals done globally this year, worth $36.3 billion, according to data compiled by Bloomberg. Last year’s deals worth $285.3 billion were the second highest on record, behind 2007.
Share Buyback

BHP rose as much as 3.4 percent to A$47.42 in Sydney trading, the most since Nov. 5, while the benchmark S&P/ASX 200 Index dropped 0.5 percent. BHP, whose shares traded at A$46.84 at 1:14 p.m. local time, today also announced a A$5 billion off- market share buyback as part of the $10 billion program unveiled Feb. 16.

The Chesapeake transaction helps the company become a “very, very powerful petroleum” producer with natural gas assets in Western Australia and stakes in U.S. Gulf of Mexico oil projects, Yeager said today.

Investor and regulator concern helped sink three investments proposed by Kloppers, 48, in the past four years worth more than $100 billion, including last year’s offer for Potash Corp. of Saskatchewan Inc. That, combined with record- first half profit, has left BHP with $16.1 billion of cash on hand.

Chesapeake agreed to sell all of its interests in about 487,000 net acres of properties in central Arkansas, the company said. Shale formations consist of dense rock that can be broken apart to release oil and gas. The transaction is expected to close in the first half of this year, Chesapeake said.
BHP’s Reserves

Fayetteville holds about 2.4 trillion cubic feet of gas, equivalent to 456 million barrels of oil, compared with BHP’s total proved U.S. reserves of 288 million barrels, according to its 2010 annual petroleum review.

BHP, Australia’s largest oil and gas company, paid about $1.98 for each thousand cubic feet of estimated proven reserves, Michael Bodino, an analyst in Fort Worth, Texas with Global Hunter Securities, said in an interview after the announcement. In December, Exxon Mobil Corp. paid $1.92 per MCF of reserves when it acquired property in the Fayetteville Shale from Petrohawk Energy Corp.

Deal premiums this year have been announced at an average 24 percent premium, compared with last year’s average 19 percent.

“The valuation looks full, but not over the top, especially if and when U.S. gas prices start firming again,” said Platypus Asset’s Patkar.
‘Strategic Sense’

Oklahoma City-based Chesapeake said Feb. 7 it intends to raise $5 billion this year by selling its Fayetteville shale holdings and its stakes in two companies. It will use the money to cut debt.

The purchase “makes good strategic sense and is capable of delivering BHP some very good growth and returns over the medium to longer term,” said Tim Schroeders, who helps manage $1 billion at Pengana Capital Ltd. in Melbourne. “The deal is not risking the company, shouldn’t run into regulatory hurdles, and adds another leg for growth within the petroleum division.”

BP Plc paid $1.9 billion for a 25 percent stake in Chesapeake’s Fayetteville shale in 2008, a month after buying all of the company’s operations in the Woodford Shale of Oklahoma’s Arkoma Basin for $1.75 billion. Chevron Corp. agreed to buy Atlas Energy Inc. to add acreage in the gas-rich Marcellus Shale in the U.S. East. Exxon acquired XTO Energy Inc., a shale-gas producer, for $34.8 billion in stock and debt in June.

Cnooc Ltd., China’s largest offshore energy producer, in January agreed to pay $570 million in cash for a one-third stake in Chesapeake’s Niobrara shale project in Colorado and Wyoming.
‘Major Producer’

BHP will take over the running of the asset through the purchase, which also includes pipelines, and plans to spend as much as $1 billion a year developing shale resources, Yeager said on the call.

BHP expects to invest as much as $30 billion developing Western Australian gas assets, which include the proposed Browse LNG project led by Woodside Petroleum Ltd. and the Scarborough venture with Exxon Mobil Corp., Yeager said.

“This will do nothing to our Gulf of Mexico focus, nor will it do anything to our WA LNG focus,” he said. “This gives us an instant, credible avenue to go do more of this.”

Chesapeake said Jan. 6 that it wanted to cut its debt 25 percent in two years by selling assets, while increasing production by 25 percent. Bodino said. This announcement is a sign that Chesapeake is following through.

“It’s like turning a big tanker in the ocean,” said Bodino, who rates Chesapeake’s shares a “buy” and owns none. “You know it’s going to be a big, wide turn, but once it picks up steam it’s very powerful.”

Bank of Nova Scotia is advising BHP on the transaction, and Jefferies Group Inc. is working with Chesapeake.


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