Chevron buys into shale gas

Oil giant to pay $4.3 billion for Moon gas producer Atlas Energy

Moon natural gas producer Atlas Energy Inc. has agreed to be acquired by Chevron Corp. for $4.3 billion in a deal that accelerates the involvement of the world's major oil companies in development of the Marcellus Shale, a geologic formation containing vast reserves of natural gas.

Until now, Chevron hasn't made significant moves to expand into America's underground shale deposits, waiting as other energy companies rushed to tap wells with new drilling technologies that can produce gas cheaper than before.

But with natural gas prices continuing to languish, analysts say the company based in San Ramon, Calif., is striking at a moment when the price is right.

"When the market is weak, that's when it's time to act," Argus Research analyst Phil Weiss said.

PG COVERAGE PG COVERAGE The PG's coverage of the Marcellus Shale issue.

Despite the current situation where there's enormous supply and weak consumption, natural gas is expected to be in demand in coming years because it produces fewer emissions compared with other fossil fuels.

Even with reduced consumption, Atlas has grown its company-wide work force to about 700 people, from 500 at the beginning of the year. As Chevron assumes control, "the only impact that we would see would be positive" in terms of jobs, said Jeffrey F. Kupfer, Atlas senior vice president.

With the move to acquire Atlas, Chevron joins a procession of major oil companies into the Marcellus Shale region.

In December, ExxonMobil agreed to buy Fort Worth, Texas, natural gas producer XTO for $41 billion, a deal that closed in June, gaining 280,000 Marcellus acres. In May, Royal Dutch Shell PLC, Europe's largest oil company, bought Marshall-based East Resources for $4.7 billion and picked up 1.05 million acres for gas production, including 650,000 Marcellus acres.

Chevron has come shopping in Western Pennsylvania before. Twenty-six years ago, the company bought Pittsburgh-based Gulf Oil for $13.2 billion in what was then the largest corporate buyout on record.

The Atlas Energy deal will give Atlas Energy shareholders $38.25 cash per share plus units in Atlas Pipeline Holdings, L.P., a partnership controlled by Atlas Energy. Those units are valued at $5.09 per Atlas Energy share, bringing shareholders' consideration to $43.34 per share, a 37 percent premium over Monday's closing price. Chevron also will assume $1.1 billion in Atlas Energy debt.

Besides approvals by shareholders and regulators, the deal, expected to close in the first quarter of next year, is dependent on the completion of transactions related to Atlas Energy's related companies.

In one, Atlas Energy affiliate Atlas Pipeline Holdings L.P. will pay $250 million to Atlas Energy for natural gas reserves, other energy assets and fee revenues from the investment management business owned by Atlas Energy. Most of that, $220 million, will come in the form of newly issued Atlas Pipeline Holdings units, giving Atlas Energy an 81 percent stake in the partnership.

In a second related transaction, Atlas Energy will buy 49 percent of Laurel Mountain Midstream LLC for $403 million from another affiliate Atlas Pipeline Partner L.P. The remaining 51 percent of Laurel will continue to be held by Williams Partners LP, an affiliate of the Williams Cos., of Tulsa, Okla.

The companies announced the agreement before the markets opened Tuesday. After the markets closed Monday, Atlas Energy had released its third quarter results, which blew past analysts' estimates. The company posted profits of $16 million, or 20 cents per share, compared with a loss of $714,000, or 2 cents per share, a year ago. Revenues were $371 million versus $339.8 million last year. Analysts had projected profits of 6 cents per share. News of the deal helped to send energy stocks upward Tuesday. Shares of Range Resources closed the day at $42.59, up $1.86; EQT Corp., $40.51, up $1.96; Cabot Oil and Gas, $33.84, up $1.30; and Consol Energy, $41.45, up 84 cents.

Atlas Energy's stock closed at $42.50, up $10.78; Chevron's at $83.56, down $1.24.

First published on November 10, 2010 at 12:00 am