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Can Anyone at BHP Billiton Read? They Just Dumped $15 Billion into the Shale Gas Ponzi Scheme

July 18, 2011 | About:

A couple of weeks ago I wrote about the New York Times report on shale gas and its take that shale gas is nothing more than a Ponzi scheme.

I was shocked last week when I saw BHP Billiton spend $15 billion to buy shale gas player Petrohawk Energy (NYSE:HK). I mean it is one thing for a simple investor like me to be fooled by this shale gas scam and buy a few shares of Chesapeake Energy. It is another thing entirely for BHP Billiton to fall victim to the same scam and spend $15 billion. I mean for goodness' sake don’t they have anyone on staff who is able to read the New York Times?

I’m joking of course. This isn’t even BHP Billiton’s first major shale gas investment. They had previously spent $5 billion buying shale gas assets in the Fayetteville area from Chesapeake Energy.

And while this purchase by BHP is for big dollars, it doesn’t even come close to matching the $41 billion Exxon (NYSE:XOM) spent to buy shale gas producer XTO Energy back in 2009.

It is funny how a conclusion can seem like common sense to one person, while the next person can see the same information and conclude something totally different. To me, the idea that shale gas is some sort of a Ponzi scheme is just silly. How can anyone really think that Exxon and BHP, who obviously have world class personnel with expert experience, training and access to data have made these sorts of financial commitments without being certain of what these shale resources are capable of?

And of course if for some reason you think Exxon and BHP do not have the expertise, how then do you explain Statoil, CNOOC, Total, PXP, Shell, Sasol, Reliance, BP, Mitsubishi, Petrochina and Chevron all spending billions to lock up shale gas properties as well?

Every one of those companies have done due diligence, have trained people and decided to invest billions in shale gas. What should common sense tell you? That they are all making the same mistake and that shale gas is all hype? Or that when the people with the best training and best data all reach the same conclusion that results in the confidence to spend billions that maybe shale gas does measure up?

I obviously think the correct conclusion is obvious. It isn’t like shale gas production is brand new at this point. We have production data dating back to the early days of the Barnett shale and companies like Chesapeake keep hitting and exceeding their production guidance. The production isn’t falling off the cliff. In fact it is far too successful as there is a glut of the product that is keeping a lid on prices.

The tens and tens of billions of dollars that Exxon, BHP and others have spent doesn’t just make me think that shale gas is for real. It also makes me think that we truly have run out of places to find conventional oil. Why would Exxon spend $40 billion to secure natural gas resources if they could use that money to secure additional oil resources which is much more valuable. Why not spend their capital on the high return commodity?

Interestingly what we are seeing now in the industry is that like in the unconventional natural gas revolution which was driven by independent companies like Chesapeake and EOG the move to unconventional oil and liquids resource plays is again being driven by the non-majors. Chesapeake and EOG are again leading the way in the States with companies like Crescent Point and Petrobakken doing the same in Canada.

And while I believe in the future of shale gas production I’m not interested in investing in shale gas producers. I have no idea when or if the price of natural gas will rebound. The reality is that shale gas has been far too successful for the companies that are producing it as they have killed the price for their product with the resulting increase in supply. Over time we will likely see other smaller players like Petrohawk get eaten by the big fish who can wait 10 years for a rebound in prices or a change in demand levels due to a move to LNG transportation.

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Rating: 2.7/5 (11 votes)


Tonyg34 - 6 years ago    Report SPAM
Another good article,

I've been investing in nat gas for a few years and would like to offer my two cents. If you look at where gas is trading at in Asia for example, it's 10 an Mcf, and in Europe it's 6 to 7 an Mcf, and over here we're sitting at 4 an Mcf. So there's definitely demand out there if we can get it there. It's really a problem that it is a regional market, not a global market. The fact is, a lot of these companies need to drill that acreage in order to hold it and that means they're producing more gas than what the regional or the North American demand is. So nat gas is an oversupplied market. And it's just a market where the turn on natural gas always seems to get pushed out. And this year is no different. Regardless of your timeline, we are running out of oil, we have nat gas, its just a matter of time until we switch. I don't mind being early when the pay out is this big. Long EPE and CHK
AlbertaSunwapta - 6 years ago    Report SPAM
Outside of traditional reserve discoveries and enhancements, the irony is that natural gas pricing and commensurate investor returns, may have a lot more upside potential under the ponzi hypothesis than under the plentiful resource hypothesis (should one buy traditional the reserves).

Maybe one can have their cake and eat it too as the market figures out the answer:

One, via the picks and shovels approach (drillers, pipe makers and new extraction/cleanup technologies)

Two, by buying proven conventional reserves that are suffering from all the reserve growth optimism.

Three, taking a long term approach. Just over a decade ago oil was around $10/bbl. Plentiful an cheap natural gas may lead to a broad based adoption of it in transportation, etc. thus pushing demand and prices.
Paulwitt - 6 years ago    Report SPAM
Yswolinsky - 6 years ago    Report SPAM
I dont think shale gas is a ponzi scheme, but BHP's investment is little proof. Didnt John Paulson invest in Sino-Forest?
Ranjitsudan - 6 years ago    Report SPAM
I won't mind investing in BHP. BHP should be looked as a commodity ETF with no debt.

Shale gas is just a small part of their resources/commodity portfolio; they have big leverage on oil (50% of revenue/income is generated from oil) followed by iron ore. copper and so on... So if you are bullish resources esp oil (who's not!) than BHP at reasonable price is a good long term investment.

I am not expert in forecasting natural gas price. however, one good thing about their acquisition is that they have done at the time natural gas is cheap and at the bottom of the price curve, hence not paying too much of acquistion. Far better than doing acquisition at top of the price curve. Ask RIO shareholder with their acquisition of Alcan just before GFC :-) at top of price curve.

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