Foreign Investing Driving New Era of Profit Opportunities for U.S. Gas Companies

By: Money_Morning

David Zeiler writes: U.S. natural gas companies have found a convenient new way to boost their profits - by drawing in overseas companies to help fund their development projects.

The maneuver was illustrated yesterday (Tuesday), when two large foreign companies bought big stakes in major U.S. shale projects.

French oil major Total S.A. (NYSE ADR: TOT) said it would invest $2.3 billion in Chesapeake Energy Corp.'s (NYSE: CHK) Utica Shale operation in eastern Ohio. Within hours, China Petroleum & Chemical Corp. (NYSE ADR: SNP), also known as Sinopec, announced a $2.2 billion deal to buy a 30% stake in five Devon Energy Corp. (NYSE: DVN) shale projects.

The deals follow several last year that have helped U.S. companies raise the cash they need to accelerate drilling for shale gas, which is more expensive than drilling for conventional natural gas.

"We will be seeing more of this kind of joint venture activity, bringing in foreign companies with deep pockets to offset rising development expenses for shale projects, while still allowing the U.S. company to retain control," said Money Morning Global Energy Strategist and Editor of the Oil & Energy Investor Dr. Kent Moors.

But the Chesapeake-Total deal takes this idea one step further, allowing Total to actually lease land in the Utica shale gas deposits.

"This is going to usher in a new era in how we develop the vast unconventional reserves in this country," said Moors.

Actually owning some of the shale gas deposits adds directly to the foreign company's share value, while the acceleration of the project made possible by the cash infusion boosts the U.S. company's stock.

"Having an American producer control a mega domestic project, but deflecting large chunks of the expense to a foreign company, is an ideal solution," Moors said.

That the U.S. companies retain control of the projects has yet another benefit - shielding the deals from anxious regulatory agencies that frown upon foreign companies gaining any power over any of the nation's strategic resources.

That's especially true in the case of Chinese companies like Sinopec. Back in 2005, Congress blocked the sale of Unocal Corp. to CNOOC Limited (NYSE ADR: CEO), with Unocal eventually being acquired by Chevron Corp. (NYSE: CVX).

Selling stakes in domestic drilling projects to foreign companies, by contrast, has met with little government opposition.

"Chesapeake has done this several times before -- it brought Norway-based Statoil ASA (NYSE ADR: STO) into the Marcellus, Chinese CNOOC into Eagle Ford and Colorado, Total previously into the Barnett," Moors said. "In each case, this was a deal in excess of $1 billion, requiring the foreign company to fund exploration and production first stage expenses, while still allowing CHK to control the project."

Although the hydraulic fracturing technique (fracking) used to extract the gas from the shale rock adds to the cost, the rising cost of competing fuel sources, primarily oil, has made it increasingly profitable.

The higher the price of oil goes, the more valuable the U.S. shale gas and shale oil deposits become, which has many companies refocusing on their North American operations.

Last year, for example, Devon added $700 million in U.S. leases while selling off $10 billion of overseas assets.

The frenzied rush by so many companies to get a piece of the shale gas development action in the United States is a powerful sign that large amounts of profit in addition to gas will be extracted from those deposits.

Source :http://moneymorning.com/2012/01/04/prepare-for-irans-energy-market-chaos-with-united-states-oil-fund-lp-nyse-uso/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.