Chesapeake's Found an Eager New Pupil

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.

Chesapeake Energy is a Motley Fool Inside Value pick. Statoil and Total are Income Investor recommendations. Explore any of our Foolish newsletters free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Chesapeake, and has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 04, 2010, at 5:50 PM, hobsry7350 wrote:

    OK, maybe there's someone here that can answer me a question:

    A barrel of crude oil finished the day out somwhere around $81.00. Given a scenario that keeps supply and demand level for a day or two, that doesn't increase refineries' costs, etc., how much does a $1.00 increase or decrease in the price of a barrel of oil increase or decrease the cost of gasoline at the pump?

  • Report this Comment On January 04, 2010, at 5:51 PM, hobsry7350 wrote:

    Or, maybe the Motley Fool can do a story on what I just asked above?

  • Report this Comment On January 04, 2010, at 5:52 PM, hobsry7350 wrote:

    Or, maybe do a 'class" called "Speculation 101"?

  • Report this Comment On January 04, 2010, at 11:35 PM, XMFSmashy wrote:

    hobsry7350,

    The EIA has a somewhat useful article on this subject:

    http://tonto.eia.doe.gov/energyexplained/index.cfm?page=gaso...

    That at least breaks down the components that affect gasoline prices (refining, marketing, and taxes historically account for 50%). This explains why gas prices are less volatile than crude oil.

    To answer your actual question, it's perhaps a penny or two.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1076607, ~/Articles/ArticleHandler.aspx, 11/24/2014 5:42:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement