Merrill Lynch closes deal to buy Petrie Parkman & Co.

Contacted by Oil & Gas Financial Journal shortly after the acquisition was announced in October, Petrie Parkman co-founder, chairman and CEO Tom Petrie said, “It has a good feel to it. It’s a good strategic move by Merrill and is a good opportunity for us to expand the scope of our business and services to our clients.”

Asked about the impact on the firm’s clients, Petrie commented, “There will be continuity with what we’ve done traditionally, plus there will be the additional benefit of a broader range of skill sets that Merrill Lynch brings to the table.”

He noted that Merrill Lynch has vastly more experience with commodities and hedging strategy than Petrie Parkman. ML’s acquisition of Entergy-Koch’s commodity trading operation several years ago has given them greater insight into this market segment, said Petrie, who added that this is an area that Petrie Parkman, as a boutique-sized investment bank, in the past farmed out to companies with more expertise in this area.

Merrill Lynch’s Global Commodities group is a global energy trading, marketing, and risk management company. The group’s wide-ranging product and service portfolio covers energy commodity and weather risk management, marketing and trading of natural gas and power, as well as other energy-related products.

Greg Fleming, president of Merrill Lynch’s Global Markets & Investment Banking group, commented, “Petrie Parkman has a strong reputation in the exploration and production industry built upon a focus on client service. The combination of Merrill Lynch’s broad energy capabilities with the specialized oil and gas expertise of Petrie Parkman will enable us to provide outstanding services to energy clients around the world.”

Victor Nesi, head of Americas Investment Banking at Merrill Lynch, noted that, “The acquisition of Petrie Parkman will create one of the strongest energy investment teams on Wall Street, by combining Merrill Lynch’s world-class energy bankers with the specialized exploration and production expertise of Petrie Parkman. We look forward to expanding our client coverage and bringing our enhanced capabilities to the marketplace.”

Tom Petrie, who will become a vice chairman of Merrill Lynch and a member of the executive client coverage group, told OGFJ he is happy with his new role. “I’ll be involved with senior client relationships and will be a resource for Merrill going forward.

Jim Parkman, who co-founded Petrie Parkman & Co. with Petrie, had previously exited his post as president of the company, although he reportedly retained a 29% stake in the firm. Both men had worked together at The First Boston Corp. (now Credit Suisse First Boston) prior to founding Petrie Parkman & Co. 17 years ago.

Petrie Parkman & Co. was profiled in the November 2005 issue of OGFJ.

- Don Stowers

St. Mary’s Mark Hellerstein leaving CEO post in February; company reports record income

On Feb. 26, St. Mary Land & Exploration’s Mark Hellerstein will step down as CEO and transition into his new role as non-executive chairman of the Denver-based E&P company. Tony Best, currently president and COO, will take over as CEO at that time.

In addition, Javan (Jay) Ottoson has been hired as COO, scheduled to join the company on Dec. 18, at which time Best will relinquish the COO position while continuing to serve as president until he takes over as CEO in February. Ottoson served most recently as senior vice president - drilling and engineering at Energy Partners Ltd. in New Orleans.

Hellerstein, 55, said he is leaving his position because he is “at the perfect age to serve on corporate boards, including non-profits,” and he wants to pursue personal interests, including his hobby of performing as a ventriloquist.

His departure comes on the heels of St. Mary’s reported earnings of $55.9 million, or $0.88 per diluted share, for the third quarter of 2006. This compares with third quarter 2005 earnings of $27.3 million, or $0.42 per diluted share.

Hellerstein and Best discussed developments at St. Mary in a recent interview with Oil & Gas Financial Journal.

“In the third quarter, we had record quarterly net income, discretionary cash flow, and production,” said Hellerstein. “We are pleased that we were able to accomplish these results both in absolute terms as well as on a per-share basis. Increasing shareholder value is the primary focus for us at St. Mary, and this quarter is one more data point in a long line demonstrating that commitment.”

Hellerstein joined St. Mary in 1991 and helped take the company public the following year. Since that time, the company has produced a 19% compounded annual rate of return on share prices to its shareholders.

“Our goal has always been to maximize value to our shareholders,” he said. “It’s been a phenomenal run. We have surpassed our target of providing a 15% rate of return to our shareholders each year, and we have been able to replace 200% of production year after year. Our growth has been both through acquisition and via the drill bit.”

Tony Best noted several new developments during the recent quarter. “We had several positive operational developments in the third quarter. At Centrahoma, we saw improved results in the Woodford shale as we continue to work our way up the learning curve. In the ArkLaTex, new stimulation techniques in the Hosston and upper Cotton Valley formations at the Elm Grove field should add substantial value to this field. The exploration program using hydrocarbon indicator technology has resulted in 5 discoveries out of 6 wells in the Gulf Coast this year.”

Best continued, “In the Rockies region, our Hanging Woman basin coalbed natural gas project produced 12.0 MMcfe/day gross as of the end of September, Additionally, subsequent to quarter end, we closed on two niche acquisitions in the Mid-Continent and Permian regions. We clearly have a lot to be encouraged about as we finish 2006 and head into 2007.”

In November, St. Mary entered in an agreement to acquire oil and gas assets in West Texas from several undisclosed private parties for $250 million in cash. The properties are in the Midland basin and target the producing formations in the Spraberry interval.

St. Mary attributes 78.1 bcfe of proved net reserves to the assets, which are producing about 16.0 MMcfe/day. This transaction, the largest in the history of St. Mary Land & Exploration, was scheduled to close in mid-December, just as this issue of OGFJ was going to press. The purchase price will be funded with bank borrowings under the company’s existing credit facility.

Best commented, “When I took this job, I took a hard look at the management’s approach to the business. I could not have written a better business plan - it was even better than advertised. The slate of assets and the talent pool at St. Mary are deeper than I expected.”

- Don Stowers

Randy King presents on transaction landscape at Platts conference

There has “never been a more interesting and exciting” time in the industry, said Randy King, co-head of investment banking at Petrie Parkman & Co. (set to be acquired by Merrill Lynch, see p.12). His focus was the transaction market, looking back on successful acquisitions in volatile commodity markets, and giving an outlook for 2007.

Speaking at the November 15th Platts Oil & Gas Acquisition & Divestiture conference, King presented on today’s transaction landscape.

King concentrated on five areas.

• First, the industry is showing strong E&P equity performance. In short, strong performance and strong prices are here to stay.
• Second, the balance sheets are well positioned for growth. “Look for continual effort by public companies to consolidate,” he continues.
• Third, he notes that industry cash flow exceeds F&D reinvestment. This is an “industry that doesn’t need money; it can live out of cash flow.” Finding and development costs are close to $3 given the rise in service costs. He expects 2007 to be at record levels.
• Fourth, there has been an increased focus on growth through the drillbit. There is “so much more value given to underdeveloped areas these days,” says King.
• Finally, as far as the 2006 track record, King states that we are headed for a record year on asset transactions and says that the acquisition business is “strong.”

King looked back on 2006 and talked about a few transactions that took place in the volatile commodity market.

Houston-based, privately-held Merlon Resources has assets in Texas and the Nile delta in Egypt. The company had the opportunity to sell excess gas. Twenty-one companies came out to participate in the data presentation of Sempra. The seemingly logical buyer was Melrose as it was undercapitalized and ran a parallel sales process. In February of ’06 the company signed a $225 million merger agreement with Centurion with a “fiduciary out.” In April of ’06 the company ultimately sold to Melrose for $265 million, an offer which topped Centurion’s.

Privately-held Chief Holdings LLP was an upstream and midstream company focused on the Barnett Shale. Chief found itself in a core ownership position and was looking for a midstream company to link up development. When Petrie Parkman came in, the company was not sales ready. They created a reserve report on exploitation on the play and set their sights on an E&P and midstream buyer. The company sold to Devon and Crosstex Energy. Devon bought the upstream side, while Crosstex focused on the midstream. The transaction totaled $2.7 billion. King called it a “great fit combination.”

“2006 was a double-barreled story.” As for 2007, King states that “the search is on.”

“The industry is fully capitalized and looking beyond the Barnett for unconventional plays,” he continues. He says to expect strong commodity prices for the foreseeable future. His opinion is that “we are only one cold winter away from double digit gas prices” and that the true settling price will be “north of $12” as years go on.

- Mikaila Adams

Apache’s Kahraman B-22 tests 16 MMcf, 486 b/d in Egypt’s Khalda concession

Apache Corp.’s Kahraman B-22 wildcat natural gas well, located 18 miles north of the company’s Qasr field in Egypt’s western desert, tested 16MMcf of gas and 486 barrels of condensate per day from a 40-foot section in the Jurassic Lower Safa formation.

The Kahraman B-22 prospect was identified using a new Jurassic exploration model based on the geological and geophysical analysis of the Qasr field. Qasr has produced a total of 97 bcf of gas and 4.2 million barrels of condensate from the Jurassic reservoir since production started in July 2005.

Apache operations in Egypt.
Photo courtesy of Apache Corp.

The wildcat is located approximately 18 miles north of Qasr field and 9.3 miles south of Shell’s Obaiyed field, the nearest Jurassic gas production. The well was drilled to the Jurassic Lower Safa formation at a total depth of 13,822 feet in order to appraise the westward extent of the shallow Kahraman “B” Bahariya oil field and to explore for deeper traps in the Alam el Bueib and Jurassic Safa formations.

The Kahraman B-22 logged a total of 84 feet of net pay from Jurassic-age sands between 12,379 and 12,849 feet. The thickest and best quality of this pay was perforated between 12,805 and 12,840 feet and fracture stimulated. The Lower Safa tested at an average rate of 16 MMcf of gas and 486 barrels of condensate per day on a 2-inch choke with a flowing well head pressure of 660 pounds per square inch. Results from the recently drilled Kahraman UC-88 well, located 3.3 miles to the southwest of the Kahraman B-22, indicate a possible Jurassic sandstone play expanding northward through the Kahraman B-22 well and onto Apache’s Shushan “C” concession. Apache recently acquired 83 square miles of new 3-D seismic over the Shushan “C” lease. The Kahraman B-22 is located on the southern edge of this play and new wells are planned in the Shushan “C” concession to extend the Jurassic play.

“This discovery opens a new chapter in Apache’s exploration and development of Jurassic formation gas reserves at Khalda,” said Rodney J. Eichler, executive vice president and general manager of Apache’s operations in Egypt. “Beginning with the Qasr discovery - the largest in Apache’s 52-year history - we have drilled nine commercial discoveries tapping Jurassic formation gas reserves at Khalda and completed 34 producing wells. To date, Apache has booked 2.3 trillion cubic feet of gas and 67 million barrels of condensate at Qasr and other Jurassic fields.”

Currently, gross production from Apache’s Jurassic fields is 512 MMcf of gas and 18,200 barrels of condensate per day, which is the limit of existing processing facilities. Current net production is 224 MMcf of gas and 8,000 barrels of liquid hydrocarbons per day.

Apache has approximately 23,000 square kilometers of 3-D seismic data covering nearly 56% of its 10 million acres in Egypt, Eichler said. It has been key to identifying deep structures missed by earlier 2-D surveys.

Earlier exploratory efforts in the area failed because many of the wells stopped short of the Jurassic objectives. The integration of modern geological concepts using 3-D seismic interpretation tied to well log correlations provides a better understanding and mapping of the Jurassic formations.

Apache has also awarded a $200 million contract to Petrofac Ltd. to construct a third processing train at its Salam natural gas plant on the Khalda Concession. The new train, to be completed before the end of 2008, will expand Khalda gas processing capacity by 100 MMcf of sales gas and 14,000 barrels of sales condensate per day to 610 MMcf and 52,000 b/d, including access to processing capacity at Shell’s Obaiyed plant that will increase to 210 MMcf and 15,000 b/d before the end of 2008.

In addition, Apache has proposed construction of a similar processing train that would bring total processing capacity to 710 MMcf of gas and 66,000 barrels of condensate per day by the end of 2008. The fourth train is awaiting approval from the Egyptian General Petroleum Corp.

- Mikaila Adams

Chevron makes significant gas discovery in Australia

Chevron Corp. has made a significant natural gas discovery at its Clio-1 exploration well located 90 miles offshore northwestern Australia in permit WA-205-P. The Clio-1 well was completed in September 2006 and was drilled using Transocean’s semisubmersible drilling rig Jack Bates in water depths around 3,000 feet with total vertical depth of drilling to 15,500 feet.

The well discovered 623 feet of net gas sands in the Mungaroo formation, which places Clio as one of the top wells in Australia in terms of total net pay. “Our two significant gas discoveries in Chandon and Clio this year demonstrate the benefits of Chevron focusing our exploration program in key basins such as northwestern Australia,” John Watson, president of Chevron International Exploration and Production, said.

“Our continued exploration success in Australia, combined with our commitment to developing these resources, offers great prospect for gas markets in Australia and across the Asia-Pacific and North America regions.”

Jay Johnson, managing director of Chevron Australia, said, “The Clio discovery highlights the quality of our exploration capability in the region and the significance of northwestern Australia to Chevron’s energy portfolio.

“Chevron will be undertaking further work, including a 3-D seismic survey program starting in mid-December, to better determine the potential of the gas find and subsequent development options,” he added.

“Our efforts to commercialize the fields of the Greater Gorgon area, our commitment to the expansion of the North West shelf venture and our increased exploration and development program in the region all have the potential to deliver significant long-term benefits to Australia,” explained Johnson.

Chevron affiliates Chevron Australia Pty Ltd. and Texaco Australia Pty Ltd. operate permit WA-205-P and hold 67% interest. Shell Development Australia holds 33%.

Chevron Australia is operator and 50% joint venture participant in the Gorgon Project, joint venture participant in the North West Shelf Venture, operator and joint venture participant in the Barrow Island and Thevenard Island oil fields, and operator of significant exploration acreage located off the northwest coast of Australia.

- Mikaila Adams

Pride International acquires deepwater semisubmersibles; agrees to multiyear contracts

Pride International Inc. has reached an agreement to extend the existing contract on its deepwater semisubmersible Pride North America, operating offshore Egypt, for an additional 3 years. Separately, the company also reached agreement to operate its deepwater semisubmersibles Pride Brazil and Pride Carlos Walter and its midwater semisubmersibles Pride South Atlantic and Pride South America under 5-year agreements offshore Brazil. Expected aggregate dayrate revenues under these agreements total approximately $2.1 billion, with an additional $200 million of performance bonus opportunities.

The 3-year contract for the Pride North America includes a fixed daily rate of $443,000, with the third year adjusted by a maximum of 10%, according to an index of average contract dayrates for similar rigs during the fourth quarter 2009. This contract, which is expected to begin during the first quarter of 2008, includes cost escalation provisions that commenced upon signing.

The contract terms for the rigs operating offshore Brazil include a daily rate of $295,000 per day (inclusive of a 15% performance bonus) for both the Pride Brazil and the Pride Carlos Walter; $245,000 per day (inclusive of a 10% performance bonus) for the Pride South Atlantic; and $165,000 per day for the Pride South America (inclusive of an 18% performance bonus).

Louis Raspino, president and CEO, commented, “We are pleased to execute contracts for these five rigs, which expand our relationships with two of our most significant customers, who are leading participants in the deepwater market. These agreements increase our company-wide backlog to approximately $5 billion, provide substantial revenue visibility into the next decade, and further fuel our long-term growth ambition.”

The company previously acquired its partner’s interest in the joint venture companies that own the two deepwater semisubmersibles Pride Rio de Janeiro and Pride Portland. The transaction increases the company’s interest in these two units from 30% to 100%. Constructed in 2004, the Pride Rio de Janeiro and the Pride Portland are both dynamically positioned and capable of operating in water depths of up to 5,600 feet. Currently, both units are operating in Brazil under contracts that expire in 2010.

Total cash consideration of $215 million was paid with cash on hand and funds available under the company’s existing credit facility.

In a related transaction, the company also reached agreement for the cancellation of future obligations under certain existing agency relationships related to 5 offshore rigs the company operates in Brazil, including the two joint venture rigs. The agreement provided for the payment of $15 million in cash.

Raspino commented, “This acquisition represents an important step in executing our stated strategy to increase our exposure in deepwater and to take advantage of close-in acquisition opportunities. With this transaction, we were able to grow our deepwater fleet in a core market, without additional construction or operational risk, at a significant discount to estimated replacement cost, and at an attractive rate of return. In addition, we are exposed to significant upside leverage to increased dayrates when the current below-market contracts on these two rigs expire. We continue to expect prospects in the deepwater market to remain strong well into the next decade, and we intend to pursue additional opportunities to expand our presence in deepwater.”

- Mikaila Adams

Chevron raises capital and exploratory budget to $19.6 billion for 2007

Chevron Corp. plans to spend $19.6 billion in exploratory spending in 2007, a 20% increase from expected outlays of approximately $16 billion in 2006.

“Our 2007 capital and exploratory program is a record level of investment by our company,” said chairman and CEO Dave O’Reilly. “About 75% of next year’s budget is for oil and gas exploration and production projects worldwide,” O’Reilly added. “Another 20% is dedicated to the company’s global refining, marketing, and transportation businesses....” O’Reilly said the 2007 budget includes $6.7 billion of total investment in the US.

The majority of the planned increase is related to the company’s exploration and production operations. The higher investment reflects the impact of several large, multiyear development projects being in their most capital-intensive phases and the effect of higher costs for materials and services currently experienced by the oil and gas industry worldwide.

Listed are some of the highlights of the 2007 program in billions of dollars.

Upstream - exploration and production

Capital and exploratory spending of $14.6 billion is budgeted for exploration, production, and natural gas-related projects. A significant component of this spending relates to upstream development projects that are building on the company’s successful and focused exploration results in recent years, including opportunities in the deepwater US Gulf of Mexico and western Africa. Funding is also earmarked for further appraisal and evaluation of other prospective areas in the world’s major hydrocarbon basins.

“Our upstream investments are aimed at finding and developing oil and gas resources to increase production and help supply the energy needs of world markets,” said George Kirkland, Chevron’s executive vice president of upstream and gas. “Our focus is both on improving the performance of existing fields and funding new projects that will provide this future production growth.”

Major upstream spending in 2007 includes projects in the following areas:

US Gulf of Mexico - deepwater exploration and development, including Tahiti, Great White Perdido, Blind Faith, and Jack.

Angola - deepwater developments, including Tombua Landana, and construction of liquefied natural gas (LNG) facilities.

Republic of the Congo - development of the Moho-Bilondo field.

Nigeria - continued development of the deepwater Agbami field, and additional deepwater exploration.

Kazakhstan - expansion of the Tengiz field.

Australia - further development of the Greater Gorgon area natural gas resource offshore Western Australia.

Canada - expansion of the Athabasca Oil Sands Project.

Brazil - development of the Frade field.

The company also indicated board approval to acquire up to $5 billion of the company’s common stock over a period of up to 3 years. This program follows 2 other $5 billion stock buyback programs that were initiated in April 2004 and December 2005, with the most recent program having been completed in 12 months.

- Mikaila Adams