Fortescue surprises with oil investment
The sums of money involved would scarcely buy 300 metres of railway in the Pilbara, yet Fortescue Metals Group’s surprise expansion into shale oil and gas is intriguing none the less.
In what shapes as the company’s first steps toward diversification beyond iron ore, Fortescue has emerged as the new cornerstone investor in tiny, Melbourne-based shale aspirant “Oil Basins Limited”.
The $4.2 million investment will give Fortescue 18 per cent of “OBL”, and that stake could grow further under options tied to the deal.
Apart from being Fortescue’s first plunge into the energy sector, the deal could write another chapter in the company’s rivalry with BHP Billiton.
Just last week BHP’s Petroleum boss Mike Yeager named the Canning Basin in Western Australia as the most likely region where BHP’s American shale operations could be deployed in Australia.
Mr Yeager confirmed that BHP was “pushing hard” on Australian shale, and was already talking to landowners.
Sure enough, today’s OBL deal gives Fortescue exposure to the Canning and Carnavon basins in WA, as well as some permits in Victoria.
OBL is already starting to sound like Fortescue – the self proclaimed “third force” in iron ore – by saying today that it was working to become the “third force” in Canning Basin shale.
Credit Suisse analyst Matthew Hope said Fortescue probably had longer-term ambitions to become a diversified company, and had previously attempted to diversify beyond iron ore.
“We did know that a couple of years back they nominated to get involved in the Mongolian coal play Tavan Tolgoi that was being auctioned off,” he said. “I think ultimately they will want to do more than just iron ore, iron ore just happens to be where they are now.”
The deal also continues a roller-coaster ride for Fortescue this year, which has kept observers guessing over the direction of its broader strategy.
Fortescue stunned the market in September when it paused its iron ore expansion plans, sacked workers and sold a power station on the back of slumping iron ore prices.
But after a quick rearrangement of its debt, Fortescue was again hinting in October that its expansion plan would resume as early as December.
At the same time it was rediscovering its bullish attitude toward iron ore prices and expansion, Fortescue was secretly asking the WA Government to waive the company’s royalty payment obligations, which were estimated to be worth hundreds of millions of dollars.
Not surprisingly that request was knocked back by the WA government, and just weeks later, Fortescue is spending again with today’s deal with OBL.
Fortescue shares were down 4 cents to $3.96 shortly before midday.