CNOOC pays $1.08 billion for stake in Chesapeake shale project

Including drilling and completion costs, CNOOC commits in excess of $2 billion to an oil and gas project owned by Chesapeake Energy Corporation -- a deal in which only non-Wall Street banks have a role.

CNOOC, China’s largest producer of offshore crude oil and natural gas, will shell out $1.08 billion for a one-third interest in 600,000 net oil and natural gas leasehold acres in the Eagle Ford Shale project in south Texas, which is owned by Chesapeake Energy Corporation.

Hong Kong-listed CNOOC, which is 64%-owned by Chinese state-owned enterprise China National Offshore Oil Corporation, will also fund 75% of Chesapeake's share of drilling and completion costs. CNOOC’s additional funding is capped at $1.08 billion, which is expected to be spent by the end of 2012.

Oklahoma-based Chesapeake Energy Corporation is the second-largest producer of natural gas and an active driller of new wells in the US.

The assets in which CNOOC is buying a stake are located principally in the counties of Webb, Dimmitt, LaSalle, Zavala, Frio and McMullen. CNOOC will have the option to acquire 33.3% of any additional acreage acquired by Chesapeake in the area, as well as an option to participate together with Chesapeake for a 33.3% interest in select infrastructure related to production derived from such assets.

Chesapeake will continue to operate the Eagle Ford Shale project, including leasing, drilling, completion, operations and marketing activities. Chesapeake anticipates the project will reach peak production of between 400,000 and 500,000 barrels of oil equivalent per day in the next decade.

“This transaction will provide the capital necessary to accelerate drilling of this large domestic oil and natural gas resource, resulting in a reduction of our country's oil imports over time, the creation of thousands of high-paying jobs in the US and in the payment of very significant local, state and federal taxes,” said Aubrey McClendon, Chesapeake's chief executive officer, in a written statement. He added that the project would further the efforts of both the US and China to reduce greenhouse gas emissions and accelerate commercial opportunities for the development of shale gas resources in China, furthering the objectives of the US – China Shale Gas Resource Initiative announced by the White House at the end of 2009.

CNOOC is the second Asian company to buy shale assets in the US this year. Reliance Industries, India’s largest company by market capitalisation, has announced three investments into shale assets in the US, most recently an investment in Carrizo Oil & Gas in August.

"CNOOC's investment in the [Chesapeake] project is in line with the company's strategy of growing reserves partly through overseas acquisitions," said Moody’s Investors Service in a ratings update after the announcement. "The company's strong financial flexibility and liquidity, with cash on hand of approximately $4.7 billion at June 2010, partly cushion investment risks related to this investment," it added. However, Moody’s also noted that CNOOC’s debt has grown to Rmb28.3 billion ($4.2 billion) as of June this year, from Rmb18.7 billion in December last year.

The increase in debt is partly attributable to CNOOC’s acquisition of a 50% stake in Bridas Corporation earlier this year for which it paid $3.1 billion. CNOOC was advised on the Bridas investment by J.P. Morgan.

Somewhat surprisingly, none of the bulge-bracket Wall Street firms had a role on this latest deal. Chesapeake's adviser on the transaction was Jefferies & Company. CNOOC's adviser was Tudor, Pickering, Holt & Company Securities. In choosing an adviser away from the big firms, CNOOC is following in the footsteps of another Chinese SOE, China Petrochemical Corporation (Sinopec). On its most recent deal, a $7.1 billion investment in the upstream Brazil subsidiary of Spanish oil company Repsol, Sinopec worked with Toronto-based Scotia Capital, the investment banking division of Canada's third-largest lender, Bank of Nova Scotia.

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