Sumitomo Corp. (8053), the fourth-largest Japanese trading company by earnings, plans to invest about $2 billion in Texas shale oilfields after agreeing to buy a stake in the assets from operator Devon Energy Corp. (DVN:US)
The trader will pay Devon $340 million cash for 30 percent of the project located in the Permian Basin, the biggest oil resource in North America, Oklahoma City-based Devon said yesterday in a statement. Including Sumitomo’s investment in drilling and other facilities, its spending will rise to $2 billion in the first three years, the Tokyo-based company said today in a statement.
Japanese companies have committed more than $30 billion to developing oil and gas properties this year as projects in the U.S., Australia and Canada promise to provide energy to fuel Asia’s growth. The Sumitomo deal is Devon’s second this year involving an Asian partner after it won a commitment from China Petrochemical Corp. in January to spend $1.6 billion to develop five exploration projects.
The purchase comes at a time when the shale boom that sent natural gas prices to a 10-year low in the U.S. is translating into the oil market. Devon joined Marathon Oil Corp. (MRO:US) and Williams Partners LP (WPZ:US) yesterday in blaming lower profits on a glut of propane and other related products.
The investment is Sumitomo’s first in so-called tight oil assets, spokesman Tsuyoshi Asada said by phone in Tokyo. The company was the first from Asia to invest in U.S. shale, buying shares in the Barnett Shale region in 2009, according to Sumitomo’s statement.
The joint venture with Sumitomo encompasses 650,000 net acres in the Cline and Midland-Wolfcamp, both in the Texas portion of the Permian Basin, Chip Minty, a Devon spokesman, said in a phone interview. Devon has previously said its 500,000 acres in the Cline formation may contain the equivalent of 3.6 million barrels of oil.
“It’s a pretty good price, well above the company’s cost basis,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets LLC, said in a telephone interview. “This is an emerging position and I think the market will view it as positive.”
Sumitomo is paying about $6,500 an acre, Hanold estimated today in a note to clients. He rates Devon shares outperform, equivalent to a buy, and owns none.
Rival Oklahoma City-based gas producer Chesapeake Energy Corp. (CHK:US) plans to sell about 1.5 million acres in the Permian Basin. Chesapeake Chief Executive Officer Aubrey McClendon estimated the value at $5 billion, or about $3,333 an acre.
Devon had said in April it was seeking to close a joint venture for the Cline assets worth about $1.35 billion next year. The agreement with Sumitomo is expected to close this quarter, with an effective start date of Jan. 1, 2012, according to Devon’s statement.
Devon said yesterday Sumitomo would invest $1.025 billion to fund 79 percent of drilling costs in addition to paying $340 million for the equity. Sumitomo’s $2 billion figure includes drilling costs over the first three years, spokesman Asada said.
Devon yesterday reported second-quarter net income fell to $477 million, or $1.18 a share, from $2.7 billion, or $6.58 a share a year earlier when it recorded a gain on the sale of assets in Brazil. Sales fell 27 percent to $1.62 billion on lower oil and natural-gas prices.
Mitsubishi Corp. (8058), Mitsui & Co. and Itochu Corp. (8001) are the largest trading houses in Japan by annual profit.
Tight oil projects involve the extraction of crude oil from shale, limestone and sandstone formations with low-permeability that are classified as source rock using the same horizontal drilling and hydraulic fracturing technologies used in shale gas development.
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