It is one of Wall Street’s worst-kept secrets that Chesapeake Energy, America’s second largest producer of natural gas, is short of cash, facing an estimated $9.2 billion gap between its capital expenditures and its cash flow, putting a gun to the head of CEO Aubrey McClendon to sell assets fast. Causing the firm’s fiscal debacle is ironically record low natural gas prices produced by the massive expansion of natural gas in the U.S. from hydraulic fracturing, or “fracking,” causing a highly indebted company built on $4 price of thousand cub meters (tcm) natural gas to descend into freefall as natural gas prices hit decade lows in recent months.
But a possible savior is in the wings for the troubled firm in the form of – India.
Seeking to expand its global position, India’s state-run oil firm Oil India Ltd. (OIL) is deep in discussions with Oklahoma city-based Chesapeake Energy and Finley Resources Inc. (FRI) about the possibility of acquiring some of the firms’ U.S. resources along with possibly forming a joint venture to exploit the firms’ oil and shale gas exploration and production assets.
The proposed partnership has been in the pipeline for the last two months, as on 14 February Chesapeake Energy discussed divestment opportunities with OIL, with Chesapeake’s CEO, Aubrey K. McClendon subsequently visiting OIL’s headquarters to present possibilities for joint ventures.
What has attracted OIL’s interest?
Chesapeake Energy’s nearly 16,200 drilling locations to develop 4.9 trillion cubic feet equivalents (tcfe) of proven reserves and about 50 tcfe of additional possible resources spread across Anadarko, Eagle Ford Shale, Permian, Powder River and DJ Basin, Utica Shale, according to the company’s web site. At the same time, FRI CEO James Finley offered OIL a proposal to jointly purse exploration and production opportunities both in the United States and abroad, putting up its nearly 900 oil and natural gas wells and working interest in more than 2,500 additional hydrocarbon wells across nine states as collateral.
On the plus side, Chesapeake Energy is a Fortune 500 company with a market capitalization of $37 billion and is the second largest producer of natural gas and 12th largest producer of liquid hydrocarbons in the U.S. Chesapeake Energy is reportedly offering Oil a stake sale in its unconventional liquid-rich Mississippi Lime play covering 2 million acres. The Mississippi Lime play in northern Oklahoma is a conventional but complicated carbonate reservoir rich in oil and natural gas liquids (NGL) like butane, which many analysts believe is turning the Mississippi Lime into the newest hot U.S. energy area.
The move is significant for OIL, whose assets in India's northeast account for its entire crude oil production and the bulk of natural gas output. Seeking to broaden its horizons, OIL has been aggressively seeking out overseas assets. New Delhi allowed OIL to go global in December 2005 and since then it has acquired stakes in assets in countries including Venezuela, Libya, Gabon, Iran, Egypt, Yemen, Nigeria and Sudan, but virtually every one of these countries comes with significant political risk attached, unlike the U.S. And New Delhi is quietly applauding OIL’s business acumen, as India, the world's fourth-largest oil importer, still imports about 80 percent of its crude needs.
Further Indian acquisitions of distressed U.S. energy assets may be in the works, as Indian gas utility GAIL India recently agreed to buy a 20 percent stake in one of Carrizo Oil & Gas Inc.'s shale gas assets while top private firm Reliance Industries has recently concluded three shale gas joint ventures.
And for the Indian firms, for buying into the U.S. energy market, “caveat emptor.” U.S. law currently prohibits producers from exporting domestically produced oil, and OIL has foreign competition for asset stripping Chesapeake Energy’s assets. In 2011 Australian mining firm BHP Billiton bought into Chesapeake Energy’s natural gas assets for $4.75 billion and China's state oil company CNOOC spent $1.1 billion to acquire a 33.3 percent interest in Chesapeake Energy's 600,000 net acres in the Eagle Ford Shale assets in Texas. Far from throwing more rupees at Chesapeake Energy, OIL’s Delhi accountants might wish to examine the firm’s business and accounting practices that led it to conduct such fire sales.
By. John C.K. Daly of Oilprice.com