Europe's leading oil and gas players have beaten down the door to get at Chesapeake Energy's (NYSE: CHK ) "Big Four." I'm talking, of course, about Chesapeake's major U.S. shale plays. BP (NYSE: BP ) jumped into the Fayetteville, and then Statoil (NYSE: STO ) stampeded into the Marcellus. Now, Total SA (NYSE: TOT ) is taking a shot at the Barnett, where the whole shale story began.
I was wondering when Total would get on board. Royal Dutch Shell has made its move on the Montney in Canada, while Eni (NYSE: E ) and BG Group have taken stakes in U.S. plays. In fact, when BG sidled up to EXCO Resources (NYSE: XCO ) in East Texas six months ago, I pointed to Total as the next likely entrant into the amazing shale race. We learned today that Total began talking to Chesapeake about teaming up in the Barnett at around that time.
Foreign players have made it no secret that their intent is to learn the ways of the American shale tamers, and then take that technology global. Total clearly shares this mind-set. The two companies today mentioned the possibility of collaborating in both the Eagle Ford shale, and various Canadian plays that Total has its eye on.
In a recent interview with Dow Jones Newswires, Petrohawk Energy's (NYSE: HK ) CEO trashed the notion of sharing shale expertise with outside partners, saying "teachers don't make a lot of money." So what's in it for Chesapeake?
This company racked up a lot of debt as it amassed its giant collection of shale assets, and each joint venture allows Chesapeake to deleverage. This particular deal is bringing in $800 million up front, with an additional $1.45 billion in drilling carries (meaning that Total covers 60% of Chesapeake's share of the costs) over the next three years or so. That's about the same breakdown, in percentage terms, as the Statoil joint venture.
These drilling carries have the effect of supercharging Chesapeake's rates of return. They also secure a big part of Chesapeake's capital budget, regardless of what happens to natural gas prices. This last point is important, because Chesapeake, by lightly hedging its production, is taking one of the biggest bets on rising gas prices of any of its peers.