* Chesapeake sells Arkansas shale gas assets to cut debt
* BHP shares up 3 pct on shale deal
* Deal to be funded from cash reserves
* First BHP purchase since failed Potash bid
* BHP confident no competition issues with deal
(Adds Chesapeake background)
By Michael Smith and Sonali Paul
SYDNEY/MELBOURNE, Feb 22 BHP Billiton
is buying shale gas assets from Chesapeake Energy Corp
for $4.75 billion, pitting itself for the first time against oil
giants and China in the battle for the fast-growing energy
source in North America.
The deal marks the top global miner's first attempt at
picking up assets since failing on three mega-deals over the
past three years and sets it further apart from its mining peers
with a big bet on the world's biggest gas market.
"BHP have had (three) multi-billion deals which have tipped
over, so the market should be pleased that this is one that is
going to go through and it is a change of direction in terms of
looking at their petroleum division," said Ric Ronge, portfolio
manager at Pengana Capital.
BHP said it was buying Chesapeake's holdings in Arkansas'
Fayetteville shale natural gas field, put up for sale by the
No.2 U.S. gas producer just two weeks ago to help trim a heavy
Chesapeake's move at the time sparked talk it was bowing to
pressure from billionaire Carl Icahn, a 6 percent stakeholder.
Following a shale gas asset buying spree and in the face of
persistently low natural gas prices, the company has said it
wants to back away from gas and look for oil instead.
Shale gas is gas extracted from shale rock, using a
technology called hydraulic fracturing or "fracking". Critics
say the process contaminates ground and surface water with
chemicals that can cause cancer, birth defects and other
The deal pits BHP head-to-head against China in a race for
global energy assets, following state-owned PetroChina's
C$5.4 billion ($5.5 billion) agreement to buy shale
gas stakes from Canada's largest gas producer, Encana Corp
earlier this month.
China's CNOOC earlier bought about $2.4 billion
worth of shale stakes from Chesapeake, while Indian energy
companies including Reliance Industries have also been
investing heavily in the burgeoning sector.
BHP shares jumped more than 3 percent in Sydney trade on
news of the deal, which the company will fund from its
substantial cash reserves of $16.1 billion. Australia's broader
market was down 0.4 percent .
Energy firms have invested billions of dollars to develop
shale gas in the United States in recent years, flooding the
U.S. natural gas market with gas supplies and weighing down
prices despite a bounce in other commodity prices in the past
But BHP Petroleum chief Michael Yeager was bullish that U.S.
gas prices would improve as demand for cleaner energy grows, and
said even at current levels, the company would make healthy
earnings margins on shale gas.
"We're delighted to inform you today of a very, very
substantive piece of business that we feel is a huge and very,
very positive addition to our petroleum company within BHP
Billiton Corporation," Yeager told reporters, adding the deal
would be cash and earnings accretive from day one.
BHP said it was paying $1.77 per thousand cubic feet of gas
(Mcf) of proved reserves. ExxonMobil bought Petrohawk
Energy's Fayetteville shale assets in December valuing
its reserves at $1.92 per Mcf.
NO REGULATORY HURDLE
BHP's acquisitions strategy has shifted focus to its
petroleum division after regulatory and political obstacles
dashed its $39 billion takeover bid for fertilizer maker Potash
Corp , a full takeover of Rio Tinto
and an iron ore joint venture with Rio Tinto.
"It is probably the only division BHP has where they are not
going to run into regulatory or anti-trust issues with an
acquisition of size," said Ronge, whose resources fund owns BHP
Last week BHP said it planned to spend around $80 billion
into expansions over the next five years to cash in on booming
Chesapeake's Fayetteville shale assets include about 487,000
acres of leasehold and producing natural gas properties in
Arkansas in the United States, one of the world's 30 largest gas
Chesapeake said the deal with BHP Billiton Petroleum
included existing net production of about 415 million cubic feet
of natural gas equivalent per day and about 420 miles of
BHP aims to triple daily production from the new asset as
the field is developed, and plans to spend $800 million to $1
billion a year over 10 years to develop the field, Yeager said.
Yeager was confident BHP would not run into any competition
or environmental issues with the purchase, noting it was in a
rural area in a state that is very pro-business.
Chesapeake was advised by Jefferies & Company on the deal,
which is expected to close in the first half of 2011.
($1 = 0.983 Canadian Dollars)
(Additional reporting by Rebekah Kebede in PERTH; Editing by
Balazs Koranyi and Lincoln Feast)