Why did Chesapeake and Petrohawk sell their Fayetteville Shale assets?

You may be surprised to hear which companies are buying up the Arkansas properties.

The Fayetteville Shale is one of the most successful shale gas plays in the United States, so why have several of the largest producers decided to pull out in the past few months, and who is buying their assets?

On Dec. 23, Houston-based Petrohawk Energy announced it had completed the sale of its natural gas assets in the Fayetteville Shale, roughly 157,000 net acres primarily in Cleburne and Van Buren counties in Arkansas, to XTO Energy, a subsidiary of ExxonMobil, for $575 million. The sale date was retroactive to Oct. 1, 2010. In addition, Petrohawk agreed to sell its midstream assets in the Fayetteville Shale to XTO for $75 million.

Petrohawk's estimated proved reserves in the Fayetteville Shale were nearly 300 billion cubic feet of natural gas and production (as of Dec. 31, 2010) of 98 million cubic feet of natural gas equivalent per day.

The deal left Petrohawk with significant assets and production in the Haynesville Shale in North Louisiana and the Eagle Ford Shale play in South Texas. The company's Eagle Ford assets have both an oil and a gas liquids component, both of which currently bring higher prices than dry gas. The Fayetteville Shale is primarily a dry gas play.

As a much larger company, ExxonMobil can afford to wait out the current low-price environment for natural gas while understanding the long-term value of the Fayetteville reserves.

Another smaller independent, Triangle Petroleum, divested its 10,400 non-operated net acres in Conway County in the Fayetteville Shale in 2009 and has since been acquiring assets in the oil-rich Bakken Shale play and the Three Forks play in North Dakota and Montana.

Oklahoma City-based Chesapeake Energy said Feb. 21 that it will sell all of its substantial Fayetteville Shale assets to BHP Billiton Petroleum for $4.75 billion in cash. Chesapeake is the second-largest gas producer in the Fayetteville shale after Houston-based Southwestern Energy.

Chesapeake has said that it plans to reduce its long-term debt by 25% in 2011-2012 and plans to use the net proceeds from these sales and its previously announced Niobrara joint venture to retire about $2 billion to $3 billion of its shorter-dated senior notes and also to reduce borrowings under its revolving bank credit facility.

The move will allow Chesapeake to focus more on higher-margin oil assets as oil prices spike and natural gas prices remain low. As a dry gas play, the Fayetteville Shale is not as profitable at this time as several other "wet gas" and crude oil plays – notably the Eagle Ford, the Haynesville, the Bakken, and the Niobrara.

Chesapeake has been forging alliances with several major overseas companies by establishing joint ventures in shale plays, which will allow it to tap into cash-rich companies to help develop the Oklahoma company's assets. For example, China's state-owned CNOOC Ltd. agreed to pay Chesapeake $570 million for a one-third stake in the Niobrara Shale project and will also pay two-thirds of the project's drilling costs, up to an additional $697 million.

Chesapeake's holdings in the Fayetteville Shale include 487,000 net acres in northern Arkansas. The assets have proved reserves of 2.5 trillion cubic feet of natural gas equivalent and are currently producing 415 million cubic feet equivalent of natural gas per day. The sale also includes about 420 miles of pipeline. As part of the transaction, Chesapeake will provide essential services for up to one year for BHP Billiton's Fayetteville properties for an agreed-upon fee. The deal is expected to close in the first half of 2011.

As with ExxonMobil, BHP Billiton is a deep-pockets player that says it considers the Fayetteville Shale assets it purchased to be "a world-class onshore natural gas resource."

J. Michael Yeager, CEO of BHP Billiton, commented, "The purchase of this long-life field immediately adds over 10 trillion cubic feet of gas resources to our portfolio and is consistent with our strategy of investing in large, low-cost asserts with significant volume growth for future development."

Southwestern Energy is the original Fayetteville Shale driller and still the largest producer in the play. The company also owns substantial midstream assets. As of Dec. 31, Southwestern had spud a total of 2,445 wells in the play since its commencement in 2004.

In reporting its 2010 financial and operating results, Southwestern reported production and reserve growth of 35%, reserve replacement of 430%, and finding cost of $1.02 per Mcfe. Net income of $604.1 million was up 16% from 2009.

"2010 marked another record year for Southwestern Energy," said Steve Mueller, president and CEO. "Despite lower realized gas prices, we set new records in 2010 for production, reserves, earnings, and cash flow…Our low cost structure is the key in the current gas price environment, as our finding and development cost of $1.02 per Mcfe and production costs of $0.93 per Mcfe for 2010 are among the lowest in our industry."

Thus far, it appears that Southwestern has the stamina to survive and even thrive in the current low gas-price environment along with several of its larger peers, BHP Billiton and ExxonMobil.

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