A recent Wall Street Journal article reports that Barclays PLC has bought natural gas production in Texas from Chesapeake Energy Corporation, which was willing to sell it because of debt. Betting that natural gas prices will jump upward, Barclays purchased $1.15 billion in “Barnett shale natural-gas production,” from Chesapeake (WSJ). The Barnett shale is a massive natural gas reserve that covers over 5,000 square miles and 20 counties in Texas. It could contain as much as 40 trillion cubic feet of natural gas (BSEEC).
Chesapeake has been selling production like this to lower its debt load. This is all in hope of increasing investment in the company from the market. Ultimately, this move is still in recovery from the recession, which hit Chesapeake hard. The most interesting part of this article is that each company in the deal has a very different strategy. Barclays is betting that prices will rise or stay steady in order to sell at a profit. They hope that gas demand rebounds and that drillers slow so that supplies shrink and prices increase (WSJ). Chesapeake is trying to grow while the natural gas prices stay low. To demonstrate how low prices have gone for natural gas, Barclays paid 20% below the market price for this massive amount of gas. However, this price is still higher than the average market price this year for similar assets (WSJ). Overall, the price of natural gas has declined this year because of increased production.
This is a rather simple article, but I think it holds some interesting lessons. First, it shows how companies can be motivated to pursue a deal like this. Clearly, both Barclays and Chesapeake have different ideas about what the price of gas will do. It just goes to show how an acquisition, whether of a company or some sort of production mechanism, is just a bet. This article also demonstrates what we have been discussing in the blog: natural gas. It reinforces our convictions that prices of natural gas are currently low and that it is a growing industry. I do not have any problem with this deal at all. It just underscores our belief that natural gas is a growing industry.
"Facts About Barnett Shale." Barnett Shale Energy Education Council. Barnett Shale Energy Education Council. Web. 6 Oct 2010.
Day, Matt. "Barclays Makes Big Bet on Shale." Wall Street Journal (2010) Web. 6 Oct 2010.
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