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Why Chevron's $3.2B Shale Gas Buy Isn't Such a Gamble

It seems like just yesterday -- OK, it was last month -- that Chevron (CVX) poo-pooed the idea of buying up U.S. shale gas assets because entry in the market was still too expensive, a view leadership has shared about repeatedly. So what happened over at Chevron between the warnings and this week's purchase of unconventional gas producer Atlas Energy for $3.2 billion (plus another $1.1 billion in debt assumption)?

Chevron's decision to jump into shale gas at a time of abundant supply and depressed prices may seem like a gamble. Under terms of the deal, Atlas shareholders will receive $38.25 in cash for each share, plus a pro-rata distribution of Atlas Pipeline Holdings valued at $5.09 per share. That means Chevron paid a 37 percent premium to Atlas' closing price the day before the deal was announced. With gas prices so low, the deal looks rather expensive.

And prices may continue to fall. Two recent reports, the IEA's World Energy Outlook and the Energy Department's monthly Short-Term Energy Outlook, provide a rather dismal short-term view of natural gas. Gas inventories increased 19 billion cubic feet in the week ended Nov. 4 to 3.84 trillion cubic feet, according to the Energy Department. IEA meanwhile noted the current glut of gas will peak soon, but may dissipate only very slowly.

Despite the data, Chevron's gamble isn't that risky at all. We're talking about a major integrated oil company that can ride out the peaks and valleys of gas prices. This isn't a Florida condo flip, but a long-term investment. And it's actually pretty good timing considering the position that smaller independent unconventional gas producers are in.

Independents have a trifecta of rising operating costs, low gas prices depressed by abundant supply and large acreage positions to maintain. Atlas, for example has 486,000 net acres of Marcellus Shale and 623,000 net acres of Utica Shale. Many of these companies don't have the depth in their balance sheet to hold these positions.

Photo from Flickr user alan cleaver, CC 2.0