BNP Paribas Fortis North American energy monthly - Virtual Metals

BNP Paribas Fortis/VM Group October 2009 | BNP Paribas Fortis North American energy monthly | 3
to buy the natural gas business of Crosstex Energy for $266m. The lesson that is
being applied everywhere is that takeovers priced between $250m-$500m that
subsequently turn out to have been misjudged are unlikely to seriously affect the
financial health of a company compared with a mismatched target costing $5bn.
Textbook example of rise and decline
Then of course there is Chesapeake Energy. Here is a classic example of a
company enjoying a meteoric rise – up to the point of almost setting up its own
television service promoting the benefits of gas shale – and then being forced to
retrench just as quickly as it attempted to reduce its crippling debt. Whereas
some investors in Chesapeake have taken exception to the $112m payout
(including a one-off $75m bonus) for CEO Aubrey McClendon at a time when
Chesapeake’s fortunes have been under attack, McClendon has been tireless in
spotting potential weaknesses in the company and plugging them with asset
sales and refinancing operations.
The company’s most recent divestment occurred in late September with the sale
of a 50% stake in its midstream assets in the Barnett Shale in Texas, as well as
non-shale midstream assets in the Arkoma, Anadarko, Delaware and Permian
Basins. In return for $588m in cash, Chesapeake is injecting these assets into a
50:50 joint venture with Global Infrastructure Partners. But there may be more
to Chesapeake than restructuring its assets for a quick cash fix. With a share
price currently trading around $27, Chesapeake has a market capitalization of
about $17bn. McClendon is currently in the business of talking up gas prices –
and the prospects for his own company – when the US economy stages a
recovery so his recent forecast that gas will be fetching between $6-$8 MMBtu
by next summer should be taken with a grain of salt. If McClendon proves to be
correct, however, Chesapeake will have weathered its worst financial crisis since
being set up 20 years ago. But as gas prices rise, Chesapeake will become all the
more attractive as a takeover opportunity with a price tag of about $25bn.
Mention Chesapeake and the name Petrohawk also springs to mind. Over the
past five years, this Houston-based independent has absorbed such companies as
Wynn-Crosby, Mission Resources and KCS Energy on its path to greatness, but
the collapse in gas prices has left it dangerously exposed to predators. By late
September, Petrohawk had announced the sale of Permian Basin properties to a
privately-owned company for $376m in cash. This asset sale follows on the
heels of August’s stock issue that raised almost $600m which was intended to
pay down debt and, somewhat optimistically, fund new acquisitions. With a
share price of about $23, Petrohawk has a market capitalization of just under
$7bn, which is well within the resources of some of the larger oil companies.
Large acquisitions
But is there something bigger in the offing? There has been constant speculation
over the past three years that ExxonMobil would make a bid for BG Group, the
UK gas group. So what has changed in the meantime to make a bid more likely
now? First of all, ExxonMobil has been sitting on the record profits it earned
from the spike in oil prices last year and it desperately needs to make a sound
value-for-money acquisition. The attraction of BG Group in the meantime has
been enhanced by its participation in one of the largest discoveries of oil ever
made in the southern hemisphere. BG has a 30% stake in the Guara discovery in
the Santos Basin offshore Brazil and along with field partners Petrobras (45%)
and Repsol (25%) is preparing to develop this surprise jackpot. By BG’s own
account, the discovery, which was made in June 2008, has since been judged
capable of an initial production output of 50,000 b/d and the field has estimated
recoverable volumes of up to 2bn barrels of oil equivalent. It is one of the ironies
of the modern oil and gas industry that a major discovery which would normally
underpin the future prospects of a company for decades may have made BG
more vulnerable to a takeover. BG has a current market value of about £36bn
($57bn) and any takeover offer would need to apply at least another £8bn
premium to current stock values.