Asian Sovereign Wealth Targets US Shale Gas

The sovereign wealth funds of China and South Korea are set to lead a $900m investment in a leading US producer of natural gas from shale rock, becoming the latest Asia-based groups to focus on the sector.

China Investment Corporation and Korea Investment Corp are in advanced negotiations to join a consortium planning to acquire convertible preferred stock in New York-listed Chesapeake Energy, according to people familiar with the matter. The talks follow last week's disclosure that Temasek, the Singapore state investment fund, and Hopu Investment Management, a Beijing-based group, had acquired $600m of its convertible preferred stock.

Chesapeake signaled last week that it would issue a further $500m of preferred stock by mid-June, but this second tranche has swollen to about $900m amid strong investor demand in Asia, people familiar with the situation said.

CIC and KIC are each expected to acquire about $300m worth of preferred stock, with the remainder purchased by Hopu, Seatown, an affiliate of Temasek, and a Japanese industrial group. CIC and KIC could not be reached for comment.

The Asian funds believe the price of natural gas, trading at less than a third of the price of oil on an equivalent basis, is at a cyclical low point and that demand will climb for environmental reasons.

The investment also underscores how Asia's SWFs are turning to natural resources, seen as more tangible than sectors such as financial services.

Gas is about 30 per cent less carbon-intensive than oil and about 50 per cent less than coal. New drilling technology has also led to higher estimates for US gas reserves, of 100 years' worth at current usage rates, up from 30 years' worth.

The investments form part of steps by Chesapeake to raise up to $5bn over the next two years, to reduce debt and attain an investment-grade rating.

The convertible preferred stock carries a coupon of 5.75 per cent. The combined $1.5bn investment in preferred stock would eventually translate into an equity holding in Chesapeake of about 10 per cent.

Chesapeake is either the number one or number two in the four biggest US shale fields: Haynesville, Marcellus, Barnett and Fayetteville.

By Sundeep Tucker for The Financial Times. May 20, 2010.

SOURCE:
Financial Times: "Asian Sovereign Wealth Targets US Shale Gas"