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2 big deals for US shale

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2 big deals for US shale

In one day, a pair of megadeals worth nearly $13 billion reshaped the shale landscape in several regions.

Chesapeake Energy Corp. on July 26 announced that it reached an agreement to sell its entire operating position in the dry gas Utica Shale in Ohio to the privately held Encino Acquisition Partners LLC for up to $2 billion, a transaction that includes over 900,000 net acres in the state, 920 operated and nonoperated wells, and related infrastructure and equipment.

Chesapeake also announced that it is shifting its focus to oil, including a production ramp-up in the Powder River Basin, which the company said was lined up to be its "oil growth engine."

"While we are reducing our full-year natural gas and NGL volumes accordingly, we are raising our oil guidance by 500,000 barrels," President and CEO Doug Lawler said.

Analysts were generally in favor of the sale, though John Freeman at Raymond James Financial Inc. argued that the purchase price did not seem to value much of the acreage. "Our preliminary math suggests that the Utica asset was sold for roughly our estimated value of the producing assets under NYMEX strip pricing, implying little value for undeveloped upside."

BHP Billiton Group made big waves on the same day, announcing that oil and gas giant Bp Plc will acquire Petrohawk Energy Corp., the entity that holds BHP Billiton's Permian Basin, Eagle Ford and Haynesville assets, for $10.5 billion. The Australian miner decided to divest its onshore assets after pressure from activist shareholder Elliott Management Corp. for changes to the company, including the sale of its U.S. shale assets and the simplification of its corporate structure.

As BHP's net debt is toward the lower end of its $10 billion to $15 billion target range, the company expects to return the net proceeds from the deal to shareholders, which would likely come either via dividends or a share buyback. BHP Billiton CEO Andrew Mackenzie said the sale will help the company "simplify and strengthen" its portfolio to generate shareholder value and returns for "decades to come."

Analyst reactions were mostly positive for both sides of the deal. "BP was previously underweight to U.S. tight oil compared to its peers. This deal transforms BP's U.S. business — it will immediately raise its U.S. production by almost a fifth while providing competitive returns and volumes growth. We see BP's combined U.S. production hitting 1 million boe/d in 2020, with the potential to reach close to 1.4 million boe/d by 2025," Wood Mackenzie senior analyst Maxim Petrov said in a July 27 statement.

Analysts from major banks said the sale enables BHP to focus on other of the company's businesses that it does well. "BHP is known for having Tier 1 assets which they execute well, like coal, copper and iron ore, so it makes sense to move on from their oil and gas purchases [in the U.S.]," UBS mining analyst Jade Little told S&P Global Market Intelligence.