CNOOC will acquire a one-third interest in an 800,000 acre shale oil and gas lease in the US for a $570 million upfront payment and a phased payment of up to $697 million related to drilling costs. The lease is owned by Chesapeake Energy Corporation.
Hong Kong-listed CNOOC is 64%-owned by Chinese state-owned enterprise (SOE) China National Offshore Oil Corporation, which is China’s largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world.
The acreage is located in the Denver-Julesburg and Powder River Basins in Colorado and Wyoming respectively. CNOOC will acquire a 33.3% stake for $570 million, payable in cash at closing, which is expected by the end of this quarter. CNOOC will also fund 66.7% of Chesapeake’s share of drilling and completion costs until an additional $697 million has been paid, which is expected to be by year-end 2014.
Chesapeake, the second-largest producer of natural gas and an active driller of new wells in the US, will conduct all leasing, drilling, completion, operations and marketing activities for the project. CNOOC has also negotiated an option to acquire a one-third equity interest in any additional acreage Chesapeake acquires in the area and an option to participate with Chesapeake in midstream infrastructure related to production generated from the assets.
In October last year CNOOC committed in excess of $2 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, also owned by Chesapeake. That deal was the first time a Chinese SOE had invested in onshore energy resources in the US.
CNOOC followed India’s largest private-sector company, Reliance Industries, in buying shale gas assets in the US. In April last year Reliance shelled out $1.7 billion to buy a 40% interest in a 300,000 acre natural gas field owned by Pennsylvania-based Atlas Energy Resources. Then, in June, the Indian firm invested $1.3 billion for a 45% interest in around 212,000 net acres in a property called Eagle Ford Shale from Pioneer Natural Resources. Finally, in August, Reliance paid $392 million for a 60% stake in a joint venture with Carrizo Oil & Gas.
China has been acquisitive across a broad spectrum of natural resources assets as it seeks to secure supplies for its 1.3 billion strong population. But China has been treading with caution in the US, as it is loathe to trigger any situations that could be turned down by regulators, said sources. Accordingly, both the acquisitions China has announced in the US so far are for minority stakes.
“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,” Aubrey K McClendon, Chesapeake’s chief executive officer, said in a written statement.
Shale-gas is natural gas released from rocks. The US has been a leader in developing technology to mine shale-gas cost effectively. The interest by both Chinese and Indian companies in shale-gas assets is also driven by the desire to secure access to the technology necessary to develop shale-gas reserves in their own countries.
This latest deal paired the same advisers who earlier worked with CNOOC and Chesapeake on the Eagle Ford shale deal. CNOOC was advised by Tudor, Pickering, Holt & Co Securities while Chesapeake’s advisor was Jefferies & Company. Jefferies was also the sell-side adviser to Atlas on the Reliance investment. It subsequently flipped on to the buy-side for the investment by Reliance in Carrizo.
Boutique investment banks have been making inroads into clients who have traditionally worked with bulge-bracket investment banks. Part of their success is attributable to a strong sector focus. For example, Jefferies is well known for its natural resources expertise. This is increasing the competition for mandates from SOEs and large companies which are target clients for a range of investment banks.
However, bulge-bracket firms still have an advantage when it comes to financing. The cross-border M&A ambitions of Indian firms have always been financed by international banks, although recently domestic banks such as State Bank of India and Axis Bank have been stepping up the ante and lending balance sheet to their Indian clients’ forays overseas.
Chinese SOEs have so far not demanded financing as a local banking system flush with funds has been supporting their M&A deals. However, last year Chinese acquirers were directed by the government to start financing their cross-border acquisitions from external sources. The acquisition by China Petrochemical Corporation (Sinopec) of a 9.03% interest in the Syncrude oil sands project for $4.65 billion in April last year was financed by loans from a consortium that included Societe Generale and Credit Agricole. Investment banks with larger balance sheets can still wrest business back from boutique competitors by their ability to commit, underwrite and lead debt financing.
