BHP Billiton Moves Into Shale Gas Market

Investors usually think of BHP Billiton ADR (NYSE: BHP) as a metals and mining company. It does, after all, have leading positions in coal, iron ore, copper and other metals.

But it also has a rather large oil and natural gas business. And recently, it made a move to bulk up in the energy sector.

BHP made its debut in the U.S. shale gas market by taking $4.5 billion out of its cash pile. That went to buy the Arkansas-based gas business of Chesapeake Energy (NYSE: CHK), including 487,000 acres of leasehold gas properties in the Fayetteville shale.

Those assets currently produce about 400 million cubic feet of natural gas per day.

That will increase BHP’s oil and gas production from about 430 million daily barrels of oil equivalent to about 500 million. It will also increase its oil and gas reserves by about 45%, from 3.7 billion barrels of oil equivalent to 5.4 billion.

As BHP Petroleum’s CEO, Mike Yeager, says, the deal will instantly make the company “a major North American shale gas producer.”

BHP’s Ambitious Long-Term Oil and Natural Gas Strategy

BHP’s decision to pay that large sum shows its ambition in expanding its oil and natural gas business. It is set on diversifying away from metals to other commodities, including uranium and potash.

Right now, BHP doesn’t see the acquisition environment in the metals industry as favorable. Its CEO Marius Kloppers has stated repeatedly that higher prices have greatly inflated potential acquisition targets’ value.

The company believes organic expansion is the only possible way to grow its metals sector right now. But it doesn’t see any such problem acquiring energy plays.

In January, an company executive said BHP “would not feel uncomfortable if the total energy proportion of its overall business is somewhat higher than one-third from time to time” in terms of earnings before interest, tax, depreciation and amortization (EBITDA).

In the six months ended December 31, 2010, BHP Petroleum’s underlying EBITDA earnings represented only 19% of the company’s total. But that made it the company’s third most profitable division after iron ore and base metals.

This leaves lots of room for the energy division to expand, especially into North America. BHP already operates offshore oil wells in the Gulf of Mexico.

United States Natural Gas Assets and BHP

BHP Billiton’s energy quest will likely focus largely on United States natural gas assets. After all, the U.S. consumes the most natural gas than any other country.

Natural gas is one of the few commodities that has gone down in price over the past few years. So buying into producing it meshes nicely with BHP’s strategy on not overpaying for assets in the natural resources sector.

In recent months, U.S. natural gas has traded in the $4 per million BTU range. A supply glut, fueled by the shale gas boom, has pushed down U.S. natural gas prices to this level from the $13.69 per million BTU record hit in 2008.

But even there, BHP sees the Chesapeake assets giving it an instant earnings lift, generating strong profit margins and return on capital. Based on current natural gas prices, the Fayetteville field will generate about $1.5 million a day.

So it makes sense that BHP wants more U.S. shale gas assets. It may even now have companies like Southwestern Energy (NYSE: SWN) and some of its gas assets on its radar screen.

BHP also thinks it might triple production at the Fayetteville acreage during its 40-year operating lifetime. To make that happen, it might spend up to $10 billion over the decade to develop the field.(Investment U Research)