Tuesday, November 9, 2010

Chevron, Welcome to the Shale Party; What About the Other Independents?

This morning, Chevron announced that it is acquiring Atlas Energy, a big leaseholder in the Marcellus Shale, for an enterprise value of $4.3 billion, including $1.1 billion of assumed debt.  With this acquisition, most of the biggest players are now represented at the shale party.

Atlas controls 630,000 acres in the Marcellus Shale, but almost more importantly, Chevron is buying the company's experience in drilling shale.  This experience will continue to be used in the Marcellus but it can also be leveraged in some of Chevron's international shale projects.  Atlas also is a joint venture partner with India's Reliance Industries in the Marcellus, so Chevron will step in to that relationship in Atlas's place.

I've been waiting for Chevron to make its move in North America, and I think it picked a pretty good time.  Chevron has been involved in several European shale ventures, but those are speculative compared to the North American variety.

Investors might squawk about buying a natural gas company when prices are low and no catalysts are on the horizon, but I would argue that this is the perfect time.  When prices started to tank a couple of years ago, many observers thought there would be a feeding frenzy of opportunistic acquisitions.  Instead, independent operators creatively scrapped their way to survival through joint ventures, added financial risk and cost cuts only to be rewarded with another cycle of crappy commodity prices.

Gas drilling is a capital-intensive endeavor and smaller companies can only hold out so long in an terrible price environment.  E&P is a cyclical business by nature, and in dips you see consolidation (BP/Amoco, Exxon/Mobil, Chevron/Texaco, etc.).  E&P companies survive the cycles through heft.

But an aircraft carrier can't navigate a river.  Smaller independents are nimble and hungry with a higher tolerance for risk.  They are more than likely to be the first player in a new arena like shale.  Big companies might be able to spend billions in a blink of an eye, but they don't move quickly and they won't move unless they are comfortable they can get an enormous return on investment.

Now, reality is starting to take hold and prolonged low commodity prices are leading to acquisitions. This time, the bigs are buying the independents for their head start in shale and their expertise.  Maybe I'm sentimental, but I hate to see the shale-focused independents go away.  Others will rise to take their places, but it has been a fun and wild ride so far.

Taking a quick perusal of the stock market this morning looking at the "Haynesville-leveraged" companies, it seems as though investors seem to be betting that GMX Resources (+8.3% at post) and Petrohawk (+6.6% at post) might be next.  We'll see...

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