World Oil Powers Buy Into U.S. Shale
Jan 10th 2012 9:54AM
Updated Jan 10th 2012 11:52AM
Chesapeake Energy (NYS: CHK) and other companies that also spent all their money buying up a ton of acreage in multiple shale plays are finally hitting pay dirt as foreign investment dollars pour into U.S. shale plays. As the price for acreage climbs, investors should recognize that there may be more at stake than just oil and gas.
Buy, buy, buy!
Though a handful of American companies like EV Energy Partners and Kodiak Oil & Gas are also making acquisitions, there has been a surge of recent acquisitions by foreign companies seeking entry to American shale plays:
- Sinopec (NYS: SHI) buys into five different Devon Energy plays.
- Total (NYS: TOT) invests in a Chesapeake Energy/Enervest joint venture in the Utica Shale.
- Japanese trading house Marubeni drops $1.3 billion for a minority interest in the Eagle Ford Shale.
And that was just last week! Other foreign acquisitions include Statoil's pickup of Bakken producer Brigham Energy, and Spain's Repsol's $1 billion joint venture with SandRidge Energy (NYS: SD) at the end of last year.
Two kinds of investments
For foreign companies, investing in a U.S. shale play can have dual outcomes: financial reward and educational know-how.
The financial rewards are obvious, at least in the plays with high percentages of oil and natural gas liquids. Energy production is booming in the U.S., thanks largely to unconventional drilling methods, and shale plays like the Bakken, Eagle Ford, and Permian Basin are generating large profits for American companies.
Foreign companies want a piece of the action, but they also want to acquire the knowledge and firm up the partnerships that can help them exploit unconventional resources abroad. Though countries like Russia, Iran, and Qatar have large conventional reserves, the Energy Information Administration estimates that other countries in desperate need of energy -- China, Argentina, and South Africa -- have large unconventional sources that can also be developed, if only someone knew how.
How much is your education worth?
I feel like Morgan Housel asking this question, but in all seriousness, if the price of acreage continues to climb, these outside companies are going to hit a point of diminishing returns, regardless of whether the assets produce as expected.
According to the consulting firm Strategic Energy & Economic Research, a typical rate for a shale lease is $5,000 to $8,000 an acre. Here are the going rates for acreage in some of the most recent deals:
- Marubeni -- $25,000/acre in the Eagle Ford (2012)
- Marathon Oil (NYS: MRO) -- $21,000/acre in the Eagle Ford (2011)
- Total -- $15,000/acre in the Utica Shale (2012)
The spending seems even more egregious when you consider that many of these companies are simply buying stakes in these plays and not picking up the entire leases outright. For example, Total's multibillion-dollar deal with Chesapeake was only for a 25% stake in 600,000 acres.
It is estimated that Chesapeake has invested $2 billion in 1.5 million acres in the Utica Shale. Even when you consider that the foreign companies are also paying for production costs, and not just acreage, that is a very impressive return on investment for Chesapeake.
The recent trend in acquisitions will affect investors in very different ways. Is your company paying down debt and funding production costs with foreign dollars? Or is it overpaying for acreage that is not guaranteed to produce?
Perhaps your company is walking the line, hoping to reap rewards and learn a thing or two in the process. In the end, if the acquired assets don't produce as expected, you'd just better hope someone was paying attention in class.
Foreign oil companies are banking on high oil prices to make the most of their U.S. investments. Check out three more stocks Fool analysts think will win big if the price of oil stays high.
At the time this article was published Fool contributor Aimee Duffy owns shares of Statoil A, but she holds no other position in any company mentioned. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Total, and Statoil A. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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