Big Oil Eyeing Chesapeake Energy

Ailing Nat Gas Producer Considered a Good Catch

Ken Silverstein | Jun 07, 2012

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It’s possible that Chesapeake Energy could be in for a soft landing. As it continues to descend in value and in public confidence, the once high-flying natural gas producer is attracting some high-profile suitors: big oil companies.

At the top of the list are Chevron, ExxonMobil and Royal Dutch Shell, which are recording huge profits in the wake of high oil prices and which would want to have access Chesapeake’s bountiful natural gas supply. Doing so won’t just present a chance to get in on the shale gas craze. It would also help those oil giants become cleaner, recognizing that natural gas can also run cars, buses and trucks.

To the point, though, Chevron needs a lift. Its stock price over the last year has been as high as nearly $36 a share. Now it is roughly $16. Chesapeake is also out beating the pavement trying to raise money to cover its funding shortfalls, which are between $10 billion and $16 billion. In return for their assist, one of those oil giants would get access to 9 percent of the country’s natural gas deposits.

"Mergers and acquisitions seem to be gaining momentum in the space that could be one of the many unexpected variables that will drive stock prices higher," says Harry Rady, a hedge fund manager in San Diego, in a previous talk with this writer.

Already, ExxonMobil and Shell are big on natural gas. In fact, over the last year, they produced more of it than oil. But prices of natural gas are the lowest they have been in a decade, which has “affected” their profitability. That’s why Exxon wants the right to be able to export natural gas in the form of liquefied natural gas -- a move opposed by many chemical makers, which fear that a huge run-up in prices as a result of those potential exports.

Exxon is already the nation’s biggest natural gas producer. In 2010, it bought XTO Energy for around $35 billion. And since that acquisition, it has spent about $3 billion to collect shale gas leases throughout the United States in Texas and in parts of the southeastern U.S., as well as in Pennsylvania. The company intends to go long and deep.

And Shell is the first American oil company to strike a deal with the Chinese to help it access its huge shale gas reserves. Beyond that, it has spent billions here at home buying up the rights to dig for the fuel. In 2010, it purchased East Resources for $4.7 billion.

Chevron, meanwhile, bought Atlas Corp. in 2011 for more than $3 billion. But its business approach to shale will be measured. Meantime, BP and Statoil are also positioning themselves to win access to shale gas reserves in this country.

Business Strategy

Big Oil’s business strategy comes atop earlier estimates from the Potential Gas Committee that says that the country’s natural gas reserves are 35 percent than they were a few years ago. They now stand at more than 2,000 trillion cubic feet.

ExxonMobil, in fact, has previously said in its annual energy outlook that it anticipates natural gas to grow faster over the next 20 years than either oil or coal. BP's annual outlook adds that natural gas is the fastest growing fossil fuel and that its share of the electric generation market will continue to climb. Unconventional gas such as shale and coal bed methane will help drive up those ratios, it adds, noting that such forms will comprise 57 percent of all natural gas production by 2030.



"As the outlook shows, the world will still rely on oil and natural gas to meet much of its energy demand for years to come ...," says the American Petroleum Institute. "The outlook also underlines the growing importance of clean-burning natural gas. It notes that 'imposing higher costs for carbon emissions would impact energy prices and provide an incentive to switch' to natural gas and other less carbon-intensive fuels to meet electricity demand."

The question now posed to energy analysts is whether the oil giants will start bidding on the smaller natural gas producers that might need more financial muscle. Big Oil has typically invested much of its resources harnessing overseas oil fields. Natural gas development, in this country, has pretty much been left to smaller enterprises.

Some such as Exxon are eager to delve into natural gas. Others such as Chevron are interested but are still placing their big bets on oil. Regardless, though, they also see shale as a potentially rich new revenue source. And that is why more buy-outs may come, including that of Chesapeake. 

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