by David Fessler, Investment U Senior Analyst
Tuesday, November 15, 2011: Issue #1643
Most natural gas drillers have been scrambling to reposition their drill rigs over oil-rich acreage… And why not?
With oil once again hovering near the $100-a-barrel mark, you can hardly blame them.
But Monday’s news from BHP Billiton Limited (NYSE: BHP) contradicts that notion.
Billiton announced that it plans to spend somewhere around $4.5 billion on shale gas development. That’s not a typo. Perhaps even more amazing is that’s just what it’s going to spend next year.
That’s an enormous amount of money compared to what some other natural gas companies are spending. Many of them have repositioned their rigs and their business plans around drilling for shale oil.
But the real message Billiton is telegraphing is far more exciting than the $4.5 billion it’s planning on spending next year.
The Long-Term View on Gas
What do they know that all the other companies don’t?
Nothing, of course…
It’s just that Billiton is taking a long-term view on natural gas. They’ve developed and are executing a business plan that will pay off for decades to come.
Billiton is betting the price of natural gas here in the United States will rise more than 50 percent in less than 10 years. It also feels the LNG export opportunities here are too good to pass up.
To quote BHP Petroleum’s CEO Michael Yeager, “This [shale gas] is going to be a game-changer around the world, and for BHP Billiton not to be a part of it would be irresponsible.”
His quote was part of an investor presentation he’s giving to allay shareholder fears about the company’s foray into shale gas.
Going All In
And what a foray it’s been. In just the last year, BHP made two acquisitions totaling $17 billion. In return for its investment, it swallowed natural gas producer Petrohawk Energy, and some prime acreage from Chesapeake Energy Corporation (NYSE: CHK).
But BHP is just getting started. It plans to spend $5.5 billion by 2015, and as much as $6.5 billion annually by 2020 on American shale gas. Both numbers are about a billion higher than the company’s previous estimates.
It’s clear from BHP’s past moves and the money it’s throwing at shale gas moving forward that it sees prices for gas gradually rising from their present near-record lows.
It’s not too surprising, really. With seemingly limitless supplies here, many utilities are looking at natural gas as the fuel of choice for new power plants. They’re also spending billions to convert existing coal-fired plants to run on it.
A Contrarian Strategy
And we have yet to even scratch the surface as far as natural gas-powered transportation goes. But many of Billiton’s competitors, lured by rising oil prices, have switched to drilling for oil, since it brings higher margins.
Wells cost the same to drill and hydro-frack, regardless of what’s down the hole. And right now, oil gives them a higher rate of return for each dollar spent drilling.
But Billiton is a huge, diversified resource exploration and production company. Shale gas fits right in with its portfolio of iron ore, coal, copper, uranium and petroleum businesses.
The company plans to spend $80 billion in the next five years to expand production across its entire portfolio of commodities. Natural gas from shale fits right in with its plans. The company is projecting 545 billion cubic feet (bcf) equivalent of natural gas next year.
Yeager also commented on concerns by some investors and analysts that hydro-fracking has problems. “The technology used here has been proven and used for a long, long time. We’re subject to inspection at any time… I think the opportunity for the industry to cut corners at any level is small.”
The reality is that over the next few years, natural gas prices will slowly rise for reasons mentioned earlier. Billiton is positioning itself to be one of the top producers and exporters here in the United States. Investors who want a diversified mining and natural resource production company would be hard-pressed to find a better play than BHP Billiton.