U.S. natural gas companies have found a convenient new way to boost their profits - by drawing in overseas companies to help fund their development projects.
The maneuver was illustrated yesterday (Tuesday), when two large foreign companies bought big stakes in major U.S. shale projects.
French oil major Total S.A. (NYSE ADR: TOT) said it would invest $2.3 billion in Chesapeake Energy Corp.'s (NYSE: CHK) Utica Shale operation in eastern Ohio. Within hours, China Petroleum & Chemical Corp. (NYSE ADR: SNP), also known as Sinopec, announced a $2.2 billion deal to buy a 30% stake in five Devon Energy Corp. (NYSE: DVN) shale projects.
The deals follow several last year that have helped U.S. companies raise the cash they need to accelerate drilling for shale gas, which is more expensive than drilling for conventional natural gas.
"We will be seeing more of this kind of joint venture activity, bringing in foreign companies with deep pockets to offset rising development expenses for shale projects, while still allowing the U.S. company to retain control," said Money Morning Global Energy Strategist and Editor of the Oil & Energy Investor Dr. Kent Moors.
But the Chesapeake-Total deal takes this idea one step further, allowing Total to actually lease land in the Utica shale gas deposits.
"This is going to usher in a new era in how we develop the vast unconventional reserves in this country," said Moors.
Actually owning some of the shale gas deposits adds directly to the foreign company's share value, while the acceleration of the project made possible by the cash infusion boosts the U.S. company's stock.
"Having an American producer control a mega domestic project, but deflecting large chunks of the expense to a foreign company, is an ideal solution," Moors said.
That the U.S. companies retain control of the projects has yet another benefit - shielding the deals from anxious regulatory agencies that frown upon foreign companies gaining any power over any of the nation's strategic resources.
That's especially true in the case of Chinese companies like Sinopec. Back in 2005, Congress blocked the sale of Unocal Corp. to CNOOC Limited (NYSE ADR: CEO), with Unocal eventually being acquired by Chevron Corp. (NYSE: CVX).
Selling stakes in domestic drilling projects to foreign companies, by contrast, has met with little government opposition.
"Chesapeake has done this several times before -- it brought Norway-based Statoil ASA (NYSE ADR: STO) into the Marcellus, Chinese CNOOC into Eagle Ford and Colorado, Total previously into the Barnett," Moors said. "In each case, this was a deal in excess of $1 billion, requiring the foreign company to fund exploration and production first stage expenses, while still allowing CHK to control the project."
Although the hydraulic fracturing technique (fracking) used to extract the gas from the shale rock adds to the cost, the rising cost of competing fuel sources, primarily oil, has made it increasingly profitable.
The higher the price of oil goes, the more valuable the U.S. shale gas and shale oil deposits become, which has many companies refocusing on their North American operations.
Last year, for example, Devon added $700 million in U.S. leases while selling off $10 billion of overseas assets.
The frenzied rush by so many companies to get a piece of the shale gas development action in the United States is a powerful sign that large amounts of profit in addition to gas will be extracted from those deposits.
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Key Gas Indicators Suggest Another Midstream Push - Bloomberg:
Total Buys $2.3 Billion Utica Shale Stake From Chesapeake - Reuters:
France's Total in $2.3 billion U.S. shale gas deal - The New York Times:
Sinopec and Total Continue Shale Gas Buying Spree - Bloomberg News:
Sinopec Agrees to Pay $900 Million for Stakes in Five Devon Oil Projects
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.