Strong Third Quarter Propels U.S. Acquisitions And Divestitures To $48B

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In this case, the bookends tell the story about the books on the shelf.

And for third quarter 2011 domestic transaction activity, those bookends include BHP-Billiton's pre-emptive $15.1 billion purchase of cash-strapped Petrohawk in July followed by CONSOL Energy Inc.' $3.9 billion twin Appalachian joint ventures in September, which will accelerate development in the West Virginia Marcellus shale and open the door for liquids-rich Utica shale development in southeastern Ohio.

Otherwise, the third quarter 2011 closed the books on a story line that show deep-pocketed, technically savvy oil and gas operators placing high dollar bets on the efficacy of unconventional resources both in areas that are well-established as well as regions that are in the earliest phases of exploration.

The industry generated $23.7 billion in transactions during the third quarter 2011, according to Hart's A&D Transactions Database, which offset a tendency over the last two years towards a somnolent market in which the third quarter each year usually featured some of the lower aggregate dollar volumes of the year.

Not so for 2011. In contrast, transaction dollar volume for the third quarter 2011 nearly equaled the volume for the first half of 2011—$23.7 billion versus $24.7 billion first two quarters combined—thanks specifically to the BHP-Billiton/Petrohawk recombination.

And while BHP-Billiton cemented its position as a major player in the onshore unconventional market via the Petrohawk deal to begin the quarter, CONSOL Energy signaled that Appalachia is the place to be as it executed three transactions exceeding $4 billion to bring the quarter to an end.

Buried between the bookends is the backstory of third quarter deals and it involves the saga of a resurgent Hess Corp., which has exhibited an aggressive business approach to unconventional oil, starting with last year's consolidation program in the Bakken shale and continuing through this year’s initiative to block up Utica shale acreage. Hess, displaying a strong bias toward oil and liquids rich shales, also played a little understood roll in the unusual merger of two Hess partners that bridge the Eagle Ford shale and the Paris Basin an ocean away.

But more on that in a moment.

Fewer Deals at Bigger Prices

First, what is it about the third quarter that seems to slow transaction volumes domestically? For example, aggregate quarterly dollar volume for transactions bottomed at $10.5 billion during the third quarter 2010. Similarly, without BHP Billiton/Petrohawk, 2011 third quarter deal volume would have dropped to $8.7 billion. And of that, nearly half, or $3.9 billion, involved the CONSOL Appalachian joint ventures with Noble Energy and Hess Corp. Take away the big numbers from just three deals and third quarter 2011 transactions were more barren than the sere drought-stricken landscape in central Texas.

In fact, the A&D Transactions Database only recorded 41 deals for the quarter, a minor drop from the sparse 43 recorded in the first quarter 2011, and a startling contrast to the 106 deals recorded one year ago. Transaction numbers are falling. There wasn’t one quarter in 2010 with less than 106 individual transactions. In contrast, there hasn’t been one quarter in 2011 with more than 85 deals.

Global macro-economics and the ensuing sell off on Wall Street may serve as the default explanation underlying an otherwise slow transaction market in 2011—absent the big dollar blockbuster deals. Oil prices fell significantly in August, coinciding with a sell off on global equity market exchanges. Commodity price volatility wreaks havoc on oil and gas transactions in that buyers and sellers are set adrift on a sea of evolving valuations while uncertainty in the broader markets engenders an abundance of caution that prevent dealmakers from pulling the trigger unless circumstances are special.

And those events, in turn, underscore why the vast majority of deal volume in third quarter domestic oil and gas transactions on an aggregate dollar basis involved international players with long planning horizons and an aptitude for technological prowess. BHP-Billiton/Petrohawk and CONSOL Energy/Noble/Hess are not short-term tactics in an opportunistic market. Rather, they exemplify the ongoing theme of significant market realignment in the U.S. onshore sector that continues apace despite the disruptions in the larger economic background.

BHP-Billiton’s monster cash and debt acquisition of Petrohawk Corp. set the tone not only for the third quarter, but for 2011 as a whole. That single transaction represents 31% of 2011 transaction value on an aggregate dollar basis, and equaled two thirds of third quarter 2011 transaction value. Furthermore, at $19.5 billion, BHP-Billiton accounts for 42% of total U.S. transaction volume on an aggregate dollar basis year-to-date 2011.

Enough ink has been spilled (and pixels created) on BHP-Billiton/Petrohawk, so it is time to follow the story elsewhere in the third quarter numbers.

Don't Bogart That Joint Venture, My Friend

First off is the run of six joint ventures during the third quarter 2011. Want to know where operators are focused these days? Four of the six announced joint ventures during the quarter involved acreage in either the Marcellus or Utica shales. As for the remainder, the Eagle Ford shale and Oklahoma's Mississippi Lime each experienced one joint venture each. Of the six JVs announced during the third quarter, four involved two companies doing two deals each.

Carrizo Oil and Gas was a participant in two JVs, including a new $200 million initiative with long-time partner Avista Capital Partners in a Utica shale initiative. The deal graded out to less than $1,500 an acre on a 15,000-acre leasehold in eastern Ohio and northwest Pennsylvania. The two previously teamed up in the Marcellus in 2008. This time the rolls are reversed with Avista having blocked up Utica shale acreage while Avista previously participated as a capital provider for a drilling carry on Carrizo's Marcellus shale acreage. A second Carrizo JV opened the door for a $94 million Eagle Ford shale effort involving India's Gail Ltd., which includes a $31.5 million drilling carry.

But the main event in third quarter joint ventures involves CONSOL Energy Inc., which is seeking to accelerate development of both legacy natural gas acreage and Marcellus shale properties acquired via its $3.475 billion Dominion purchase in March 2010. In all CONSOL executed $3.993 billion joint ventures in the final 45 days of the third quarter, or 78% of third quarter joint venture volume on an aggregate dollar basis.

2011 Joint Ventures Total $8.5 Billion, And Rising

Thanks to $5.16 billion in third quarter 2011 joint ventures, the total transaction value for JVs year-to-date climbed to $8.5 billion. Furthermore, those figures bring aggregate U.S. joint venture totals to $32.7 billion with a handful of sizeable JVs projected to close in the fourth quarter. Those deals could boost total U.S. JV transaction value since 2006 closer to an aggregate $35 billion with $19.2 billion of that total occurring in the last 20 months.

There were two foreign participants in the JV market during the third quarter, including India’s Gail Ltd (with Carrizo) and South Korean capital investment firm Atinum Partners Co. Ltd. (with SandRidge Energy in a $500 million Oklahoma Mississippi Lime initiative). Atinum teamed previously with Gastar Exploration Ltd. in the West Virginia Marcellus shale.

In a change from the past, U.S. joint venture sellers are looking for partners with significant technical development expertise rather than simple financing via drilling carries, as was evidenced with CONSOL's two deals with internationally involved and technically astute players such as Hess Corp. and Noble Energy.

The Unconventional Nature of Transactions

Transactions addressing unconventional oil and gas dominated the third quarter 2011 with more than $20 billion in aggregate dollar volume, or 93% of value. However, BHP-Billiton/Petrohawk represented $15.1 billion of that total (and actually 64% of all third quarter domestic transaction value, regardless of target).

Transactions involving conventional assets reached $3.1 billion for the quarter, paced primarily by Quantum Resources Fund's $537 million dropdown of Permian Basin properties to its MLP QR Energy IP. The properties, which include 109,375 net acres in the Permian Basin, Midcontinent and ArkLaTex, are projected to produce 8,000 Boe in the fourth quarter and feature proved reserves of 37.1 MMboe, including 65% PDPs.

There were just four corporate transactions totaling $16.1 billion in aggregate consideration for the quarter though BHP-Billiton/Petrohawk represented the overwhelming majority of dollars and cast a large publicity shadow over some other significant deals.

Hess Corp. Pursues Oil Shales

Of particular note, however, is Hess Corp.'s $750 million acquisition of Utica shale driller Marquette Exploration LLC. The transaction adds a 100% working interest in 85,000 acres in southeastern Ohio for Hess, bringing its position in the Utica Shale to 185,000 acres. At first glance, the deal grades out to $8,825 per acre for property in the liquids-rich zone of the Utica. Marquette has completed one horizontal well in Jefferson County, Oklahoma, according to the Ohio Department of Natural Resources.

But the Hess/Marquette deal is more important in the context of a greater strategic effort. Hess also figures in the background of the $294 million merger between Eagle Ford shale operator ZaZa Energy LLC and Toreador Resources Corp. The latter possesses prospective oil shale acreage in the Paris Basin, which underwent an interesting permutation in June 2011 when the French parliament banned hydraulic fracturing in France and the government began revoking shale drilling permits. Hess and Toreador had teamed up to conduct initial tests on oil shales in the Paris Basin in May 2011 before the hydraulic fracturing issue complicated matters. Toreador subsequently turned its interests to privately-held ZaZa Energy, another Hess Corp. joint venture partner on 123,000 acres in the liquids rich portion of the Eagle Ford shale. ZaZa and Toreador merged in August 2011 in a $294 million transaction. No official word on the roll Hess played in the merger but, as they say in the movies, Hess’ fingerprints are all over the deal.

For plot lines, Hess took the prize in third quarter transactions, though the statuette for boldest effort goes to BHP-Billiton, with CONSOL Energy the best supporting actor.

In summary, picture the third quarter as the calm before the storm. Presenters at Hart's A&D Strategies and Opportunities Conference in Dallas at the end of August speculated that the oil and gas sector would witness a very active fourth quarter. On a dollar basis, it will be hard to top the $23.7 billion in the third quarter 2011. If it does, it will be a modernday record. Absent ExxonMobil/XTO Energy in the fourth quarter 2009, the third quarter 2011 equaled the dollar volume piled up in the fourth quarter 2010 with the two serving co-equally as the most active quarters on a dollar volume basis over the last seven quarters.

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Source: Hart Energy, Smith Bits (A Schlumberger Co.)

Contact the editor, Richard Mason, at rmason@hartenergy.com.