France’s Total has beaten a private equity firm to Chesapeake Energy’s Barnett shale assets. The energy major last week said it had exercised its pre-emptive right to acquire Chesapeake’s 75 percent in the assets that the two companies held jointly in North Texas.
The deal suggests that there may still be a future for Barnett shale, considered by many observers to be a goner as production has declined substantially in the last couple years thanks to the drop in gas prices.
First of all, it’s worth looking into what made Chesapeake exit the North Texas play: the reason has little to do with Barnett itself, but it has everything to do with Chesapeake’s debt and its ability to continue servicing its gas gathering and transportation contract with pipeline operator Williams Partners, which gathers and ships 80 percent of the gas that Chesapeake produces from Barnett.
Last month, Chesapeake said it had agreed to sell its Barnett assets to private equity-backed Saddle Barnett Resources and pay $334 million to Williams to get out of its contractual obligations that carried with them $1.9 billion in future payments under the minimum volume commitment clauses that have plagued many an energy company across the U.S. shale patch. Saddle, for its part, had agreed to pay Williams $420 million.
The deal fell through when Total stepped onto the scene, agreeing to take up the $420-million commitment from Saddle plus a payment of another $138 million to get out of three other contracts for capacity reservation.
Now, Total, like other members of the Big Oil club, is expanding its presence in the U.S. shale patch, which has proven to be much more cost-efficient – at least in some places – than large-scale offshore projects, for instance. Total is also investing in renewables, which makes its M&A moves really worth watching, as it suggests that the company has a more far-sighted strategy than its peers.
The French company claims the Barnett assets, which at the moment produce some 65,000 barrels of oil equivalent daily, are a good opportunity and that “Increasing our stake in the Barnett shale supports Total’s global strategy to be a leader in natural gas.”
In addition to its now 100 percent owned Barnett assets, the company also has a 25 percent interest in another joint venture with Chesapeake in the Utica shale, a 17 percent stake in the Tahiti field in the Gulf of Mexico, and a 33.3 percent stake in the Chinook field, also in the Gulf.
It’s worth noting that the Barnett assets, which span 215,000 acres, are not all developed, so it would be premature to say Barnett is depleted. All the more so since Total is not known for highly risky deals, so chances are there is still quite a lot of natural gas left in North Texas.
This, however, only has significance over the long term because gas prices are unlikely to soon go back to levels high enough to support a meaningful increase in drilling at the Barnett shale, as energy expert Arthur Berman notes in a detailed analysis. Chances are, Total is prepared to wait as long as necessary to get some value out of its latest acquisition, which cost it about a quarter of what it had paid for the initial 25 percent interest.
By Irina Slav for Oilprice.com
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