Chevron goes Exxon way; to buy Atlas Energy for $4.3 bln


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Chevron Corp ( CVX ), the second-largest energy company in the US, has probably taken a leaf out of Exxon Mobil's ( XOM ) book to boost its natural gas resources.

California-based Chevron said it will buy natural gas producer Atlas Energy Inc. ( ATLS ) in a $4.3 billion deal to gain attractive natural gas resource positions in southwestern Pennsylvania's Marcellus Shale.

Energy behemoths, flush with cash, have been scouting for additional resources. Recently Exxon Mobil, the largest energy company in the US, shelled out $41 billion to buy natural gas firm XTO Energy in one of the biggest deals in the industry.

Chevron has $10.96 billion in cash and cash equivalents as of Sept. 30, 2010.

Of late, cold weather in the U.S. has been driving demand for natural gas and price touched as high as $6 per British thermal unit (btu). Currently, natural gas futures are trading near a three-month high at $4.088 per btu on the New York Mercantile Exchange on expectations that cooler temperatures in the U.S. Northeast will bolster heating demand.

About 52 percent of U.S. households use natural gas for heating, according to the Energy Department.

Since late 2009, gas prices have begun to recover after the economic recession dampened the price of natural gas, resulting in lower activity as well as big deals.

No wonder now energy giants are looking to exploit the situation and are willing to acquire new potential natural gas resources like Marcellus Shale.

\"This acquisition is the right opportunity for Chevron,\" said George Kirkland, Chevron Vice Chairman. \"We are acquiring a company that has one of the premier acreage positions in the prolific Marcellus. The high quality resource, competitive cost structure in the Marcellus, strong growth potential of the asset base and its proximity to premier natural gas markets make this targeted acquisition a compelling investment for Chevron.\"

Kirkland also commented: \"The Atlas Energy assets further advance Chevron's global shale gas position, complementing the company's recent entrance into shale gas opportunities in Poland, Romania and Canada.\"

Why Marcellus Shale?

Marcellus Shale, which extends through Pennsylvania, New York, Ohio and West Virginia, is touted to become one of the biggest gas fields in the U.S. In 2002, the United States Geological Survey said the Marcellus Shale contained an estimated undiscovered resource of about 1.9 trillion cubic feet of gas.

In early 2008, Terry Englander, a geoscience professor at Pennsylvania State University, and Gary Lash, a geology professor at the State University of New York at Fredonia, said the Marcellus Shale might contain more than 500 trillion cubic feet ( TFC ) of natural gas, of which 50 TFC would be recoverable by advanced drilling techniques.

The United States produces about 30 TFC of natural gas each year and if these estimates prove correct, the Marcellus Shale could more than suffice the US natural gas demand and could be one of the biggest natural gas fields in the U.S.

Other biggest gas fields in the U.S. include Barnett Shale in Texas, Fayetteville Shale in Arkansas and the Haynesville Shale in Louisiana.

The Deal

Chevron will pay Atlas Energy shareholders $43.34 a share, a 37 percent premium to Atlas Energy's closing share price on Nov. 8.

Atlas Energy shareholders will receive $38.25 in cash for each outstanding share, and will also receive a pro-rata share of a distribution of over 41 million units of Atlas Pipeline Holdings, L.P. ( AHD ). Based on AHD's most recent closing price on November 8, these units have a value of $5.09 per Atlas Energy share.

In total, Chevron will pay Atlas Energy $3.2 billion in cash and assume net debt of about $1.1 billion.

The deal will give Chevron Atlas Energy's estimated nine trillion cubic feet of natural gas resource, which includes about 850 billion cubic feet of proved natural gas reserves with approximately 80 million cubic feet of daily natural gas production. California-based Chevron produced 5 billion cubic feet of natural gas in the third quarter.

The assets in the Appalachian basin consist of 486,000 net acres of Marcellus Shale; 623,000 net acres of Utica Shale; and a 49 percent interest in Laurel Mountain Midstream, LLC, a joint venture which owns over 1,000 miles of intrastate and natural gas gathering lines servicing the Marcellus.

As part of the deal, Atlas Energy will acquire a 49 percent interest in Laurel Mountain Midstream LLC from Atlas Pipeline Partners L.P. ( APL ) for a cash consideration of $403 million.

Atlas Energy will also sell all interests in existing investment partnerships, 175 billion cubic feet of proved natural gas reserves, and certain other energy assets to AHD for $250 million, comprising $30 million in cash and $220 million in newly issued AHD units.

Goldman Sachs is acting as financial advisor to Chevron, while Skadden Arps Slate Meagher Flom LLP is acting as legal advisor.

Jefferies & Company Inc. and Deutsche Bank Securities Inc. are advising Atlas Energy, while Wachtell Lipton Rosen Katz is providing legal advice.

Reliance JV

In April 2010, Atlas Energy entered a joint venture with Reliance Industries Limited to develop its Marcellus assets. Now, Chevron will assume Atlas Energy's role as operator with 60 percent participation in the Marcellus joint venture. Reliance, however, will continue to fund 75 percent of the operator's drilling costs estimated at $1.4 billion.

Share Movement

Shares of Chevron fell 90 cents, or 1.06 percent, in the pre-market hours Tuesday after closing Monday's trading on the NYSE at $84.80.

On the other hand, Atlas Energy shares surged 36 percent in the pre-market hours to $43.25 on Nasdaq. They closed Monday's regular trading at $31.72.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Commodities
More Headlines for: AHD , APL , ATLS , CVX , TFC , XOM

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