Natural Gas Properties for Big Boy Buyers

Oil giant BP PLC is exploring a potential deal to buy natural-gas properties from once highflying Chesapeake Energy Corp., according to people close to the British company's thinking.

A deal would be an early sign that cash-rich global oil companies are prepared to embark on a spending spree as smaller natural gas producers scramble to raise cash amid declining energy prices and tight capital markets.

What's not clear is if BP is willing to pay close to what these properties were fetching in September, before the credit crunch and a 13% drop in gas prices, or whether Chesapeake, of Oklahoma City, Okla., is willing to accept less.

BP has already done two deals with Chesapeake this year, spending a combined $3.65 billion to acquire fields in Oklahoma and a 25% stake in another field in Arkansas. A Chesapeake spokesman said the company wants to sell a stake in a Pennsylvania gas-field similar to the Arkansas deal. The spokesman declined to discuss BP's interest in acquiring additional assets. A BP spokesman also declined comment.

BP is under pressure to expand its portfolio of energy projects as concerns mount about its ability to expand production. The company has relied heavily on its Russian operations for future growth. But conflicts with the billionaire co-owners of TNK-BP, its Russian subsidiary, have put that strategy in question.

While growth is an issue, BP's balance sheet isn't. The company reported $3.6 billion in cash and short-term liquid investments at the end of June, according to energy research firm John S. Herold. That hoard gives it the financial strength to pursue deals even in the current climate.

Following its Russian troubles, BP is focusing on North American natural gas markets, where small, independent companies have pioneered new techniques to extract gas from shale, long considered a lost cause.

Chesapeake was a leader in this shale-gas exploration effort, leasing thousands of acres over the past few years. But the strategy required frequent access to debt and equity markets, both of which are now effectively closed due to the global credit freeze. It has cut $4.7 billion from its capital budget over the next two years and is seeking buyers for assets to raise cash. Chesapeake said it hopes to raise between $2.5 billion and $3 billion by the end of the year through asset sales and other financial deals.

A person close to BP indicated the company was interested in acquiring some of Chesapeake's natural gas assets, though not the whole company. Chesapeake, the largest producer of natural gas in the U.S., has said it is in talks to sell a minority stake in its Marcellus Shale gas field, located mostly in Pennsylvania, as well as other assets.

It isn't clear whether BP is interested in the Marcellus assets or prefers other assets that Chesapeake has assembled over the years. The company is one of the top two leaseholders in four of the largest emerging gas fields in the U.S.