LITTLE ROCK — Australia-based BHP Billiton Ltd., the world’s largest mining company, agreed on Monday to buy Chesapeake Energy’s assets in the Fayetteville Shale in north Arkansas for $4.75 billion.
The announced acquisition came two weeks after Oklahoma City-based Chesapeake disclosed it wanted to sell its operations in Arkansas to raise money to pay down debt.
In making its entry in the U.S. shale gas business, BHP says, it will dramatically increase what had been Chesapeake’s operations in Arkansas. It plans to expand operations to 20 rigs from the current eight rigs, said Ruban Yogarajah, a BHP spokesman.
BHP’s plans will require an annual investment of $800 million to $1 billion in Arkansas for the next decade or more, Yogarajah said.
In its 2008 annual report, Chesapeake said it planned to keep 20 drilling rigs operating throughout most of 2010 in the Fayetteville Shale. However, in an Aug. 2 conference call, Chief Executive Aubrey McClendon said the company was “comfortable” reducing drilling even further if natural gas prices continued to fall.
Companies such as Chesapeake that are primarily or solely in natural-gas production are vulnerable to market swings. Prices have been under $5 per million British Thermal Units for most of the past year. As recently as 2008, prices were close to $13 per million BTUs.
Large companies could have a stabilizing influence on the Fayetteville Shale and other such formations, according to Doug Sheridan, a managing director of Houston-based EnergyPoint, a Houston-based market-research company.
His comment was in reference to Exxon Mobil Corp.’s December 2009 announcement that it was buying XTO Energy of Irving, Texas, for $41 billion, including its Arkansas assets. Sheridan said that “independent” companies usually drill more when prices are high and drill less in times of low prices.
Historically, Exxon and similar companies have drilled “through cycles, more than drill with cycles,” he said.
“We expect to grow the business,” Yogarajah said. “We’re going to ... increase production.” Gas production in the Fayetteville Shale and other such formations became profitable with development of hydraulic fracturing, a process of extracting natural gas from underground shale rock formations by pumping millions of gallons of fluid into a well, breaking apart the rock and allowing the gas to flow freely.
All of Chesapeake’s 103 Arkansas-based employees will be made employment offers to join BHP, Yogarajah said.
There are also about 300 related jobs in the state with Chesapeake’s wholly owned service companies such as Nomac Drilling, Great Plains Oilfield Tool Rental, MidCon Compression, said Jim Gipson, a Chesapeake spokesman. Chesapeake, the second-largest gas producer in the country, agreed to provide essential services for up to one year to BHP.
The acquisition “will immediately make BHP Billiton a major North American shale gas producer,” said J. Michael Yeager, chief executive officer of BHP’s petroleum division. “This is consistent with our strategy of investing in large, low-cost assets with significant volume growth for future development.”
Chesapeake agreed to sell all of its interests in about 487,000 acres of properties in central Arkansas, the company said. The transaction is expected to close before July, Chesapeake said.
Chesapeake was an early entrant in the Fayetteville Shale formation, which stretches across north Arkansas from Fayetteville to the Mississippi River. It is the second-largest producer in the Fayetteville Shale behind Southwestern Energy.
In addition to being the largest mining company in the world, BHP is the largest oil and gas company in Australia. It has about 41,000 employees in 25 countries. It had 2009 revenue of more than $50 billion.
BHP’s operations include aluminum, coal, copper, manganese, iron ore, uranium, nickel, silver and titanium minerals, and has substantial interests in oil, gas, liquefied natural gas and diamonds.
The sale may have little effect on land and mineral-rights owners in Arkansas, Lonnie Turner, an Ozark lawyer whose practice deals with landowners, said earlier this month. The biggest hurdle in a transition is learning whom to deal with at a new company and how to interpret royalty checks, Turner said.
He noted that companies in the Fayetteville Shale have bought and sold one another’s wells many times, and new companies have come and gone since drilling started in 2004.
But Kent Walker, a Little Rock-based attorney who represents mineral-rights owners, said that in the past, Chesapeake’s asset sales have made it difficult to resolve any issues with royalty division, by bringing another company into the mix.
Chesapeake had $11.4 billion in long-term debt as of Sept. 30, according its most recent filing with the Securities and Exchange Commission. The company had promised to cut by 25 percent over the next two years.
The sale to BHP will reduce Chesapeake’s debt by 42 percent.
In 2008, BP Plc paid $1.9 billion for a 25 percent stake in Chesapeake’s Fayetteville Shale operations and also bought all of the company’s operations in the Woodford Shale of Oklahoma’s Arkoma Basin for $1.75 billion.
Exxon Mobil Corp. acquired XTO Energy Inc., a shale-gas producer with operations in Arkansas, for $34.8 billion in June.
In a related matter, Crestwood Midstream Partners LP said Friday that it has agreed to buy pipelines and other assets in the Fayetteville Shale in Arkansas and the Granite Wash play in the Texas panhandle for $338 million.
Crestwood is buying the assets from Tulsa.-based Frontier Gas Services LLC. The deal is expected to close in the second quarter, Crestwood said.
Information for this article was contributed by James Paton of Bloomberg News.
Front Section, Pages 1 on 02/22/2011