Hess (NYS: HES) has strengthened its foothold in the field of exploration and production with back-to-back investments in Ohio's Utica Shale area. The company entered into a $593 million deal with Consol Energy (NYS: CNX) for a 50% interest of exploration and development rights to some 200,000 acres. As if that wasn't enough, Hess announced the acquisition of Marquette Exploration and other leases for about $750 million with a 100% working interest in some 85,000 net acres. These deals, undoubtedly, will help increase Hess' production capacity.
So far ...
Hess' crude oil and natural gas production in the second quarter was 372,000 barrels of oil equivalent per day, down from 415,000 boepd for the same quarter of 2010. The decrease was mainly due to issues beyond the company's control, such as unfavorable weather conditions and the Libyan unrest. Hess needs to find some new and big sources of crude oil and natural gas extraction to compensate for these losses, and for that it needs to increase its undeveloped acreage position.
Ohio's Utica Shale area lies approximately two to three thousand feet below the Marcellus Shale and is rich in fossils and organic matter. The Ohio Geological Survey predicts that as much as 8.2 billion barrels of oil equivalent may be present at Ohio's Utica Shale area. Many big players such as Chesapeake Energy (NYS: CHK) , Devon Energy (NYS: DVN) , and Chevron (NYS: CVX) have moved in to take advantage of it. Hess' acquisition in the area at least ensures that it is on par with, if not in an advantageous position to, its competitors to grab a new opportunity.
The combined value of the deals made by Hess was approximately $1.34 billion, and as of June 30, 2011, Hess had a cash balance of $2.19 billion. Paying for the deal won't be a problem for Hess as only a part of it has to be paid during the closing of the deal; Hess is required to pay the balance over a period of five years. The new deals boosted Hess' net acreage position by 185,000.
The Foolish bottom line
Hess has displayed sound strategic expertise by boosting its acreage position in Ohio's Utica Shale area. The performance of the stock will largely depend upon the extraction and production of oil from the new oil fields it has acquired. Given the future prospect of the deal, I am hopeful that Hess will witness strong growth in the years to come.
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At the time thisarticle was published Fool contributor Abantika Chatterjee does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Devon Energy.Motley Fool newsletter serviceshave recommended buying shares of Chevron and Chesapeake Energy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.