Since January 2009, the oil–to–gas pricing ratio has averaged 15:1, and it doesn't appear as if this will change anytime soon. Storage levels continue to stay above the five year average, and lackluster industrial and consumer demand, not to mention strong supply estimates, suggest a bleak outlook for gas–weighted producers.
Ultimately, there are no fundamentals supporting higher gas prices in the foreseeable future, and this is already impacting the development and acquisition strategies of companies in the industry. Consequently, economics are driving the industry towards oilier pursuits.
Although the gas shales continue to be of keen interest to the industry and Wall Street, the buzz at NAPE last February was that oilier shales such as the Bakken and the Niobrara are likely to attract more attention if gas prices continue to disappoint—resulting in what could be the next hotbed of M&A activity.
Deal flow in the Bakken was steady during 2009 as companies sought additional exposure to the Williston oil shale. In fact, two of last year's larger deals were linked to Rocky Mountain oil.
The ExxonMobil (NYSE: XOM)/XTO (NYSE: XTO) deal included assets in the Bakken representing approximately $1.8 billion in value, and it was Encore Acquisition Corp.'s oil heavy reserves in the Rockies that set the stage for the merger with Denbury (NYSE: DNR).
It's no secret that public companies with assets in the oily Bakken have faired well on Wall Street despite a depressed economy as most recently demonstrated by GeoResources' (Nasdaq: GEOI) latest Bakken deal. The acquisition of approximately 42,000 net aces with a 45% operated working interest in Williams County, North Dakota garnered a quick reaction from the Street—one analyst raised GEOI's target price by $2.00 to $21.00 per share based on the news of this transaction.
While this may be indicative of Wall Street's appetite for the Williston, the Bakken is not the only oil shale game in town. Encouraging news from the DJ and Powder River basins suggest 2010 could be shaping up to be an active year for Niobrara targeted acquisitions as E&P companies pursue the "other" oily shale.
Technology used to make the Bakken work could be well suited for developing the Niobrara in both the Denver–Julesburg and Powder River basins. EOG (NYSE: EOG) got the attention of the industry with their recent discovery well in Weld County, Colorado. The company drilled the Jake #2–01H with a 4,000' lateral resulting in an estimated IP rate of 1,700 bo/d producing from the Niobrara. Consequently, EOG is already drilling another Niobrara well and has gotten permits for half–a–dozen other drilling locations in the vicinity.
Other players with significant Niobrara exposure include St. Mary Land and Exploration (NYSE: SM), Anadarko (NYSE: APC), Petroleum Development Corp. (Nasdaq: PETD), and Noble Energy (NYSE: NBL). The latter of which recently executed a transaction to acquire primarily all of Petro–Canada's and Suncor's Rocky Mountain assets for $494 million. It has been reported that Rosetta Resources (Nasdaq: ROSE) is pursuing the Niobrara in Yuma County, Colorado, and Delta Petroleum (Nasdaq: DPTR) has assets in the area as well.
Chesapeake Energy (NYSE: CHK) has also been playing the Niobrara in the Powder River basin, but they have been tight–lipped about results. However, their recent $49 million acquisition of oil shale assets from American Oil & Gas (AMEX: AEZ) and North Finn LLC leads us to believe their early efforts in drilling the Niobrara have been successful.
Rest assured all of these companies will be closely watched by their peers and by Wall Street in the coming months.
Although it is still early in the year, it seems unlikely that prices for natural gas will improve in the near–term, and E&P companies will naturally gravitate to the plays where the economics make sense—and for now, that seems to be the oil shales.
About the author
Jason Reimbold is a vice president in the Houston office of The Rodman Energy Group where his focus is A&D advisory. Rodman & Renshaw LLC (Member FINRA, SIPC) is a full–service investment bank with offices in New York and Houston. He can be reached at [email protected].
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