Experts forecast 'strong period' for energy deal-making activity

In early 2011, Chesapeake and CNOOC agreed to partner in the Niobrara-focused DJ Basin (shown here) and the Powder River Basin.Photo courtesy of Chesapeake.

Don Stowers, Editor — OGFJ

If 2010 was a time of recovery in the merger and acquisition market, 2011 is shaping up to be a very strong period for energy industry deal-making activity. This is the consensus of several analysts, advisors, and M&A market participants contacted by Oil & Gas Financial Journal.

We'll review some of the major transactions during the past 12 months to try to discern some trends. But first, let's look at some expert analysis from several industry gurus.

Walter Cumming, head of the oil and gas group at Barclays Corporate Bank in London, says in his article in this issue (see page 33) that there is an improved economic outlook for the oil and gas industry with more financing options available, which should cause a rise in M&A activity.

"Specifically in North America, it's likely we'll see more investment opportunities in areas such as exploration, despite predicted tougher regulation following incidents such as the Macondo well blowout in the Gulf of Mexico," said Cumming.

Eric Hagen, an oil and gas analyst with Lazard Capital Markets, noted that the increased focus on shale oil in plays like the Bakken, the Niobrara, and the Eagle Ford has prompted many industry observers to predict that the overseas interest in the North American energy sector will continue to gather pace, especially given the low price of natural gas in the United States.

Jason Reimbold, vice president of the Rodman Energy Group in Houston and a contributing editor for OGFJ, commented that we have seen a few very large deals thus far this year but that the total number of acquisitions and divestitures is down.

"The widening divergence of oil to gas pricing in the last year has been a key factor limiting acquisition opportunities for smaller management teams," said Reimbold.

A recent report from KPMG LLP says that oilfield service companies are continually challenged to expand and contract with cyclical market conditions, but that the larger companies appear to be weathering the latest economic storm, which has led to speculation that stronger companies are on the lookout to acquire weaker rivals.

In a report on economics at play in the Canadian oil sands, Ernst & Young says it expects to see more foreign investment and cost and risk sharing through joint ventures and partnerships.

"With average oil prices upward of $100 a barrel, the oil and gas industry is moving deeper into emerging assets and frontier areas like oil sands, which have, for some time, been too costly to produce," says the report.

Gary Adams, vice chairman of the US oil and gas practice for Deloitte LLP, says that North America is currently the epicenter of E&P transaction activity as domestic and international buyers of all types continue to be drawn to unconventional assets. The openness of US and Canadian markets to outside investment and the long-term potential of shale plays and oil sands fields are attractive to investors despite chronically weak natural gas prices.

"Looking ahead, we anticipate an active transaction market to continue as stronger players, searching for reserve replacement and technological expertise, find buying opportunities among smaller companies unable to ride out the weak market for natural gas," said Adams.

Chesapeake makes JV deals

Aubrey McClendon, chairman and CEO of Oklahoma City-based Chesapeake Energy, was one of the first executives of a US independent to use this approach to financing the development of capital-intensive shale gas and oil drilling and production. In November of 2008, McClendon announced the execution of an agreement for a joint venture with StatoilHydro (now simply Statoil) whereby the Norwegian energy giant would acquire approximately a one-third interest in Chesapeake's Marcellus Shale assets in Appalachia for the sum of $3.375 billion. The sale left Chesapeake with a two-thirds working interest in its 1.8 million acres of leasehold and a way of financing the development without giving away the farm.

A brilliant stroke by McClendon, his company received $1.25 billion in cash when the deal closed and Statoil agreed to pay the remaining $2.125 billion by funding 75% of Chesapeake's 67.5% share of drilling and completion expenditures. In addition, Chesapeake said it would continue to acquire leasehold in the Marcellus and gave Statoil the right to a 32.5% participation in any future leasehold it acquired.

Finally, Chesapeake and Statoil agreed to enter into an international strategic alliance to jointly explore unconventional natural gas opportunities worldwide.

"We believe this transaction creates substantial value for both companies and unique opportunities for international growth with one of the leading international oil and gas companies," said McClendon at the time. "Jointly we can export our world-class unconventional natural gas technology for further long-term growth."

For its part, Statoil's Helge Lund commented, "We have made a strategically important move by joining forces with Chesapeake, which is the leading US natural gas player…The agreement provides us with a solid position in an attractive long-term resource base under competitive terms."

The Chesapeake-Statoil JV left observers marveling at the deft financial maneuvering by McClendon, whose company had been considered ripe for a takeover prior to that time. A few months before the Statoil deal, Chesapeake had sold a one-quarter stake in its Fayetteville Shale assets to BP for $1.9 billion, and had also sold a 20% working interest in its Haynesville Shale properties in Louisiana to Houston-based Plains Exploration & Production for $3.3 billion.

Prior to the bold moves by McClendon, Chesapeake had been mentioned as a prime takeover target by Wall Street analysts, and BP was considered a prime suitor. However, the analysts liked the innovative approach by Chesapeake to free up capital by utilizing funds from their JV partners to cover the high cost of drilling and completion expenses. Although the company's stock didn't rise immediately, the CEO's nimble maneuverings had solved the difficult situation of being asset rich and cash poor.

Hot M&A market began with Exxon-XTO deal

Following the economic meltdown and credit crunch that started in 2008 and continued through much of 2009, the energy M&A market got a huge shot in the arm when ExxonMobil announced its $41 billion corporate acquisition of XTO Energy in December 2009. When an industry giant like Exxon shows this kind of financial commitment to the domestic natural gas industry, other oil and gas players sit up and take notice. XTO Energy was a major participant in every large US shale gas play, so this transaction set the tone for the considerable deal flow we're experiencing today.

Here are a few of the major deals in the past year and a brief analysis of each:

Apache Corp. acquires Mariner Energy — On April 15, 2010, Apache agreed to acquire Mariner in a $3.9 billion transaction, which included $1.2 billion of Mariner debt. About the same time, Apache acquired certain asset from Devon Energy in the Gulf of Mexico valued at about $1.05 billion. Apache chairman and CEO Steven Farris noted that the Mariner acquisition was a strategic step and a natural extension into the deepwater Gulf for Apache.

Arena Resources merges with SandRidge Energy — Also in April 2010, Oklahoma City-based SandRidge merged with Arena, making SandRidge the surviving entity with a combined enterprise value of about $6.2 billion. The deal makes SandRidge one of the largest producers of West Texas conventional oil and gas.

Sinopec buys into Canada's oil sands — Chinese refining giant Sinopec more than doubled China's presence in Alberta's oil sands by paying $4.7 billion for ConocoPhillips' 9% stake in Syncrude Canada Ltd.

EXCO, BG Group establish 50/50 JV in Marcellus — In May 2010, EXCO Resources entered into a 50/50 joint venture with the UK-based BG Group to operate upstream assets as well as a 50/50 midstream venture. The total value of the transaction is just under $1 billion.

Shell-East Resources deal — Royal Dutch Shell's $4.7 billion acquisition of US natural gas firm East Resources increased Shell's exposure to gas prospects in North America, including 650,000 acres in the Marcellus Shale. Shell CEO Peter Voser said his company's strategy is to consolidate its tight-gas portfolio and divest from non-core positions in North America.

Statoil-Sinochem deal in Brazil — China's state-owned Sinochem Group bought 40% of Statoil's holdings in the Campos Basin in offshore Brazil for the equivalent of about US$3.1 billion. Statoil retained 60% ownership and will serve as operator.

Reliance-Pioneer deal in South Texas — India's Reliance Industries and Dallas-based Pioneer Natural Resources signed a $1.2 billion JV transaction in the Eagle Ford shale play in June. Reliance paid $266 million in cash on closing and will pay an additional $879 million to carry Pioneer's share of future drilling costs. Reliance will also participate with Pioneer in the development of midstream assets in the Eagle Ford. Reliance also struck a $210 million deal with Newpek LLC, Pioneer's partner in the Eagle Ford.

At the end of 2010, Chesapeake Energy was running 18 operated rigs in the Eagle Ford Shale in South Texas. Photo courtesy of Chesapeake.

Total moving into Canada — France's Total said on July 7 it would buy Canada's UTS Energy Corp. for about US$1.4 billion, boosting the French company's holdings in the Alberta oil sands.

BP-Apache transaction — On July 20, Apache struck a deal with BP to acquire all of BP's oil and gas operations in the Permian Basin of West Texas and New Mexico, and in Egypt's Western Desert. Apache also obtained most of BP's upstream natural gas business in western Alberta and British Columbia. Apache paid $7 billion for the assets, which include estimated proved reserves of 385 million barrels of oil equivalent. Apache's chairman and CEO Steven Farris said, "We seldom have an opportunity like this in one of our core areas, let alone three."

Concho Resources acquires Marbob Energy — Also in July, Midland, Tex.-based Concho Resources bought all of the oil and gas assets of privately held Marbob Energy Corp. and certain affiliates for about $1.7 billion. The acquisition includes a large acreage position in the emerging Bone Spring play in southeastern New Mexico.

LINN Energy deal in Wolfberry trend — In one of the largest non-shale, non-oil sands deals of the past few months, Houston-based LINN Energy said on Sept. 7 it had signed three purchase agreements to acquire oil and gas properties in the Wolfberry trend (Permian Basin) for a combined price of $353 million. The reserve life of the field is estimated at about 25 years.

Plains Exploration inks deal with McMoRan — On Sept. 20, Plains Exploration & Production sold its interests in its shallow-water Gulf of Mexico properties to McMoRan Exploration Co. in a cash and stock deal estimated at about $818 million. A few days later, PXP inked separate deals to acquire Gulf Coast onshore assets. One transaction, with Dan A. Hughes Company, is valued at about $578 million. The other, with Houston American Energy Corp., had approximately the same value.

Chesapeake-CNOOC deal in Eagle Ford — On Oct. 10, Chesapeake Energy executed an agreement with China's CNOOC, which will purchase a 33.3% interest in Chesapeake's 600,000 net acres in the Eagle Ford Shale. The deal is valued at about $1.08 billion. CNOOC will fund 75% of Chesapeake's share of the drilling and completion costs until an additional $1.08 billion has been paid. The assets are 85% in the wet gas window of the Eagle Ford and 15% in the dry gas window of the Pearsall Shale.

Statoil and Talisman partner in the Eagle Ford — Norway's Statoil and Canada's Talisman Energy have formed a 50/50 JV in the Eagle Ford shale play of South Texas. The value of the deal is estimated at about $1.325 billion.

Chevron acquires Atlas Energy — Following on the heels of recent shale asset acquisitions in Poland, Romania, and Canada, Chevron Corp. made its first foray into the North American shale industry in November. The California-based company paid $3.2 billion to acquire Atlas energy in addition to assuming about $1.1 billion in debt, for a total transaction value of about $4.3 billion. The acquisition gave Chevron an attractive natural gas resource position in southwestern Pennsylvania's Marcellus shale play. George Kirkland, Chevron vice chairman, called the acquisition "a compelling investment for Chevron." Indeed, the Marcellus acquisition smoothes Chevron's production profile and gives the company access to significant proved reserves (nearly 1 tcf) and resource potential estimated at 9 tcf.

EnerVest acquires Barnett Shale properties — Houston-based EnerVest Ltd. and its affiliated partnerships, including EV Energy Partners LP, paid $967 million for certain Barnett Shale properties from Talon Oil & Gas LLC. EnerVest CEO John Walker commented, "The production from these wells is 29% natural gas liquids and 71% natural gas, and we plan to maintain an active drilling program."

BP-Bridas Corp. deal in South America — In one of the year's largest deals, BP sold its 60% interest in Pan American Energy LLC to Bridas Corp., the oil company owned by Argentina's billionaire Bulgheroni family and China's CNOOC Ltd. for US$7.06 billion in late November. Bridas and CNOOC already own the other 40% stake in the company. The move was part of BP's global effort to raise cash to meet compensation claims after the April 2010 Deepwater Horizon disaster in the Gulf of Mexico.

Occidental sells Argentine assets to Sinopec — China's Sinopec scooped up Occidental Petroleum's assets in Argentina in early December for $2.5 billion. Occidental said it would use the proceeds of the sale to acquire US assets in South Texas (Eagle Ford Shale) and North Dakota (Bakken Shale), to increase its stake in Plains All-American, to acquire a 50% JV interest in the Elk Hills Power Plant, and to increase it common dividend rate by 21%.

Total-Suncor alliance in oil sands — In a convoluted partnership arrangement, France's Total and Canada's Suncor Energy agreed to a $1.7 billion oil sands deal in the Athabasca oil sands region of Alberta and the two companies have also agreed to a joint commitment to develop the Fort Hills and Voyageur projects in parallel so that both come on stream in 2016. In short, Total is betting that the price of oil remains sufficiently high so that these oil sands projects remain economically viable. Like other super-majors, Total has the deep pockets to spend on projects that will not see a return on investment for years to come.

Chinese companies on shopping spree — China has been very aggressive in the transaction market, and this became even more apparent when PetroChina bought a 50% interest in Encana's Cutbank Ridge assets in British Columbia for US$5.4 billion in February. Under terms of the agreement, the two companies established a 50/50 JV that would ambitiously grow natural gas production for years to come. The other major deal (announced on Jan. 31) was between Chesapeake and CNOOC. The two companies entered into a partnership in the Niobrara Shale-focused Denver-Julesburg Basin in Colorado and the Powder River Basin in Wyoming. That transaction is valued at about $1.24 billion. The two companies are also partnering in the Eagle Ford Shale in South Texas.

Total transaction in Russia — In March, Total signed an agreement with Russia's Novatek valued at about US$4 billion in which Total will become the main international partner on the giant Yamal LNG project, holding a 20% share. The project will develop the South Tambey field in the arctic area of the Yamal peninsula.

Talisman inks deal with South Africa's Sasol — In a deal valued at US$1.1 billion, Canada's Talisman Energy and Sasol deepened their existing partnerships in several integrated development projects. The two companies also began a feasibility study to examine a world-scale gas-to-liquids facility in Western Canada.

Chesapeake sells Fayetteville assets to BHP Billiton — In a move that surprised many people, Chesapeake Energy sold all its Fayetteville Shale assets in central Arkansas to Australia's BHP Billiton for $4.75 billion. The assets are mainly dry gas. The move will allow Chesapeake to focus more on higher-margin oil assts as oil prices spike and natural gas prices remain low, said a company spokesman.

In a press briefing in the Deloitte Energy Center in Houston last month, three Deloitte executives — Jim Dillavou, partner, M&A Transaction Services; Jed Shreve, principal, Business Valuation; and Trevear Thomas, principal with Deloitte Consulting, summarized the M&A market in this way: "The recovery in M&A transactions that began the first half of 2010 continued throughout the year, driving deal count and value back to pre-recession levels. We expect this trend to continue in 2011, resulting in greater deal activity in oil and gas, particularly in the E&P segment of the industry."

They also forecast more activity among oilfield service companies as they provide a wider array of services to customers and an improved outlook for refining and marketing due to greater crack spreads.

More Oil & Gas Financial Journal Current Issue Articles
More Oil & Gas Financial Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com