Bloomberg recently reported that former Chesapeake Energy (NYSE:CHK) CEO Aubrey McClendon is considering a bid for Freeport-McMoRan's (NYSE:FCX) California oil assets. The assets, which are worth about $5 billion, would seem like a real departure from the shale-focused growth strategy that McLendon pursued at both Chesapeake Energy and now at American Energy Partners. Unless he has shale in mind there, too.
Drilling down into Freeport-McMoRan's California assets
Freeport-McMoRan has slowly been reshaping its oil and gas portfolio since it acquired the business in 2013. It exited the Eagle Ford shale, bolstered its position in the Gulf of Mexico, and has been seeking to sell the bulk of its U.S. onshore business, including its oil assets in California. The company plans to use the cash from these sales to become an even larger player in the massive oil and gas opportunity in the Gulf of Mexico. As shown in the following slide, the company sees resource potential upward of 4.3 billion barrels of oil equivalent, or BOE, in the deepwater, and another 18.1 trillion cubic feet of natural gas equivalent in the inboard lower tertiary.
This is against a mere 400 million BOE of resource potential it sees in California. Moreover, those resources come with much lower margins than the deepwater Gulf of Mexico, where cash margins are higher by $25 per BOE. So it makes a lot of sense for Freeport-McMoRan to unload these assets and reinvest the billions it would receive into additional deepwater assets.
McClendon's California dream?
That being said, there could be a whole lot more oil and gas in California than Freeport-McMoRan's estimate. California's Monterey shale is thought to hold more oil than any other shale play in the U.S. Those estimates have been called into question as 13 billion barrels of oil vanished from estimates earlier this year, and we simply do not know how much, if any, of the oil in that shale can be recovered.
What we do know is that if anyone can figure out how to get this oil out of the ground, it's McClendon. He turned a $50,000 initial investment to create Chesapeake Energy into America's second-largest natural gas producer as he spearheaded the U.S. shale revolution. He also predicted that the Utica shale would be the next big thing, and despite some early troubles that play is starting to look "extraordinary." So, it's quite possible his interest in Freeport-McMoRan's California oil assets isn't so much about the current cash flow the conventional resources are generating, but instead about the potential for the shale oil underneath these oil fields.
It will be interesting to see if McClendon wins the bidding on Freeport-McMoRan's California oil assets. If he does, it will be even more interesting to learn his plans for those assets, as milking them for cash flow just doesn't seem like his style. Instead, he might have a deeper reason to be interested in these assets, with that deeper reason being the supposedly oil-rich Monterey shale.