BHP Billiton struck a deal to buy shale gas reserves from Chesapeake Energy Corp. for $4.75 billion, pitting itself against oil giants and China in the battle for the fast-growing energy source in North America.
The deal marks the top global miner's first attempt at picking up assets since failing on three mega-deals over the past three years, and sets it further apart from its mining peers with a big bet on the world's biggest gas market.
"BHP have had (three) multi-billion deals which have tipped over, so the market should be pleased that this is one that is going to go through. And it is a change of direction in terms of looking at their petroleum division," said Ric Ronge, portfolio manager at Pengana Capital.
BHP said it was buying Chesapeake's 75 percent stake in Arkansas' Fayetteville shale natural gas field, put up for sale by the No. 2 U.S. gas producer just two weeks ago to help trim a $15 billion long-term debt load.
Chesapeake's decision to sell the stake sparked talk that the company was bowing to pressure from billionaire Carl Icahn, who doubled his stake in Chesapeake to 6 percent in December, saying it was undervalued.
Following a shale gas asset buying spree and in the face of persistently low natural gas prices, the company has said it wants to back away from gas and look for oil instead.
Energy firms invested billions of dollars to develop shale gas in the United States in recent years, flooding the U.S. natural gas market with supply and weighing down prices.
Shale gas is gas extracted from shale rock using a technology called hydraulic fracturing, or "fracking."
The deal with Chesapeake pits BHP head-to-head against China in a race for global energy assets, following state-owned PetroChina's C$5.4 billion ($5.5 billion) agreement to buy shale gas stakes from Canada's largest gas producer, Encana Corp., earlier this month.
China's CNOOC earlier bought $2.4 billion of shale stakes from Chesapeake, and Indian energy firms including Reliance Industries have also snapped up such assets.
"While people are moving into shale, it's an early-stage technology. The asset grab might happen at some stage, but the price BHP is paying shows the market's not yet hot," said Hayden Bairstow, resources analyst at CLSA.
"You need to be able to weather low prices for a few years. Obviously, someone the size of BHP can do that."
BHP's petroleum chief, Michael Yeager, was bullish that U.S. gas prices would improve as demand for cleaner energy grew, and said that even at current levels, the company would make healthy earnings margins on shale gas.
Petroleum is currently BHP's second-best performing business, after iron ore, in terms of earnings margins.
BHP shares were down 0.3 percent at 1045 GMT (5:45 a.m. EST) in London, compared with a 0.9 percent dip in a British mining index. The stock also outperformed in Sydney.
"With deal value at 2 percent of current market cap, the acquisition looks to be a small positive," said Liberum Capital.
Shares of Chesapeake, due to report quarterly earnings after the U.S. market close, were poised to rally, gaining 8.4 percent in premarket trading to $33.00.
BHP will pay $1.77 per thousand cubic feet of gas (Mcf) of proved reserves. ExxonMobil bought Petrohawk Energy's Fayetteville shale assets in December valuing its reserves at $1.92 per Mcf.
BHP, which will fund the deal from its $16.1 billion cash pile, is paying much less than the $1.9 billion BP paid Chesapeake in 2008 for 25 percent of the same shale gas field.
"It's opportunistic, there's no doubt about that," CLSA's Bairstow said.
BHP, Australia's largest oil and gas producer, will see its reserves rise by nearly half to 1.7 billion barrels of oil equivalent (boe) as a result of the deal.
NO REGULATORY HURDLE
The company's acquisition strategy has shifted focus to its petroleum division after regulatory and political obstacles dashed its $39 billion takeover bid for fertilizer maker Potash Corp., a full takeover of Rio Tinto and an iron ore joint venture with Rio Tinto.
"It is probably the only division BHP has where they are not going to run into regulatory or anti-trust issues with an acquisition of size," said Ronge, whose resources fund owns BHP shares.
Last week, BHP played down the prospect of large-scale acquisitions and said it planned to spend around $80 billion on expansion over the next five years to cash in on booming commodity prices. Analysts said this deal would not impinge on those plans at all.
BHP aims to triple daily output from the new asset as the field is developed, spending $800 million to $1 billion annually over 10 years, Yeager said.
That would help it meet a target to increase its daily production by about 40 percent to 600,000 boe equivalent by 2016, including its liquefied natural gas projects in Western Australia and oil and gas in the Gulf of Mexico.
Yeager was confident BHP would not run into any competition or environmental issues with the deal.
Chesapeake was advised by Jefferies & Co. on the deal, which is expected to close in the first half of 2011.
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