Green Acres

A review of second-half 2010 U.S. merger, acquisition and divestiture deal flow demonstrates consistent themes. And, of course, the usual cast of savvy deal-makers was on hand. The list is a familiar one, with the likes of Apache, Chesapeake Energy, Occidental Petroleum, Hess, and even ExxonMobil (through XTO) leading the way.

Also continuing was the march to U.S. onshore resource plays by international oil companies (IOCs) and the majors. Following a trend begun in 2009 and early 2010 by BP, Shell, Total, Statoil, Reliance Industries, Mitsui, BG, Eni and others, the latter half of 2010 hosted large-scale U.S. resource deals by Chevron, CNOOC and Talisman.
The A&D themes are simple: 1) it’s good to own oil, as the growing appetites of China, India, and other countries increase worldwide demand; 2) the best U.S. shale-gas plays have world-class size and economics, and natural gas will be the key source of energy in the U.S. in the future; and 3) post-Macondo blowout, the Gulf of Mexico has become an even more complicated place.

As usual, commodity outlook directed deal flow. Since March 2009, when the ratio between the three-year oil and gas strips was 10-to-1 (oil at $60 per barrel, gas at $6 per MMBtu) the oil strip has risen 60% and the gas strip has fallen 16%. The ratio is at an unprecedented nearly 20-to-1.

Have there ever been more major acreage deals? Most of the transactional value in the second half was focused on resource value (acreage, future development) rather than reserve value (proved, probable, possible reserves).

The South Texas Eagle Ford shale, due to its high liquids content, was hot as companies with acreage sought partners and capital, and companies not already in the play sought opportunities. The pure oil play Bakken hosted its fair share of deals as well. Bakken well results continue to improve, and with a rising oil price, the play has world-class economics. The Marcellus natural gas shale, which may ultimately become the largest natural gas field in the world, was also busy. It keeps demonstrating the best economics among the shale-gas plays. A conventional area that was sizzling was the Permian—no surprise, given its sheer size and high oil content.

While many companies are wringing their hands over looming market uncertainties, buyers with a specific view and a resolute, bold, decisive and confident attitude are making major moves that will pay off for a long time. The deal activity level was high, with more than $31 billion spent in the top 15 deals.
Here are highlights of these and other notable deals in second-half 2010.

The usual suspects

One of the more interesting deals, announced in November, was the Exco Resources Inc. go-private offer by chief executive officer Doug Miller, Oaktree Capital Partners, Ares Management, and T. Boone Pickens. The offer of $20.50 per share equates to about $5.2 billion. Together, this group owns more than 30% of the outstanding stock, and it will be interesting to see how this plays out in 2011. Following the go-private announcement, New York private-equity firm WL Ross & Co. acquired a 9.7% stake in Exco at approximately $18 per share, for a total of $287 million.

The larger, generalist private-equity funds continue to be progressively more attracted to energy investments.

Occidental Petroleum Corp., Los Angeles, which has historically been an opportunistic acquirer, paid $1.4 billion for 180,000 acres in the Bakken from unnamed seller(s). Even more interesting, and not unusual for Oxy as an entity that likes to shop in lower-price environments, was its $1.8-billion purchase of Shell’s conventional South Texas natural gas assets. While these are conventional assets, Oxy has plans to develop additional reserve and resource potential in the fields.

ExxonMobil has not historically been an acquisitive company, and certainly not in the U.S. onshore, but this may be changing since its XTO Energy merger. While continuing to operate XTO as a distinct entity, ExxonMobil acquired East Texas/North Louisiana-focused Ellora Energy Inc., Boulder, Colorado, for $695 million and added Fayetteville shale assets from Houston’s Petrohawk Energy Corp. for $575 million.

Apache Corp., another serial acquirer always ready when the time is right, had a busy few months in 2010. It was the first company to announce deals with BP as part of BP’s effort to raise $10 billion in a matter of weeks in the wake of the Macondo blowout. Apache completed a $3.1-billion purchase of BP’s Permian Basin assets (as well as buying an additional $7.1 billion of assets in Western Canada and Egypt). In addition, Apache closed its $4.7-billion corporate deal with Mariner Energy Inc. in November. The latter made a splendid fit with Apache’s strategy, as nearly half of its assets are in the Permian and about one-quarter is in the Gulf of Mexico.

In another major Permian deal, Concho Resources Inc., Midland, Texas, announced its acquisition of southeast New Mexico-focused Marbob Energy for $1.65 billion. This is a deal in the heart of Concho’s area of focus.

Bakken forges ahead

Hess Corp., New York, has been actively acquiring Bakken resources with its all-stock transaction in October of American Oil and Gas Inc. for $458 million (85,000 Bakken acres) and its November acquisition of EnCap-backed TRZ Energy for $1.05 billion (167,000 acres).

Williams Cos., Tulsa, also acquired significant Bakken resources, purchasing 86,000 acres for $925 million from various private sellers.

Calgary-based Enerplus Resources pursued its Bakken growth strategy with a $456-million acquisition in September from an undisclosed seller.

Common themes in 2010 deal- making involved the benefits of oil, the future of natural gas and the shake-out in the Gulf of Mexico.

Oily Eagle Ford fires up

The most active deal-doer, Chesapeake Energy Corp., Oklahoma City, kept its normal pace and completed a $2.2-billion, 600,000-acre joint venture (approximately 50% cash, 50% carry) with China’s CNOOC in October 2010. It was the first large-scale deal for a Chinese energy company in the onshore U.S., with more expected. At press time, another JV with CNOOC, in the Niobrara, was announced. China holds more than $2 trillion in foreign cash reserves (mostly U.S.) and is seeking hard-asset investments in areas that will address its massively growing energy demand.

Enduring Resources LLC, Denver, completed an interesting deal. It announced the sale of its 5,500 barrels of oil equivalent per day in production and 97,000 acres in assets to a 50/50 Talisman/Statoil entity for $1.325 billion. To balance the partners’ portfolios, Statoil also agreed to purchase a 50% interest in 37,000 acres from Talisman for $180 million, equalizing Talisman and Statoil’s total Eagle Ford acreage at 67,000 net acres each.

Dan A. Hughes Co., Beeville, Texas, sold 60,000 Eagle Ford acres to Houston-based Plains E&P Co. (PXP) for $578 million. PXP is another active transactional company and this acquisition bolstered its strategy of growing onshore resource plays while vastly reducing or completely exiting the Gulf of Mexico. As part of that program, PXP sold its deep-shelf Gulf of Mexico exploration and producing properties to McMoRan Exploration Co. for $820 million in a predominantly stock-based transaction.

Marcellus, the shale-gas darling

The second-largest deal announced in second-half 2010 was Chevron’s offer to purchase Atlas Energy Inc., based in Moon Township, Pennsylvania, and related entities in a corporate deal of approximately $4.3 billion. Within the past 12 months, ExxonMobil, Shell, and Chevron, all of whom previously put much more emphasis on their deepwater Gulf of Mexico businesses as compared to the onshore U.S., announced one or more major shale deals. These bolster the theme that the U.S. gas shales are competitive with worldwide opportunities and are a key component in the long-term U.S. energy outlook.

Emerging serial acquirer Reliance Industries, of India, announced its third U.S. shale deal, spending $392 million to buy out Avista Capital Partners and a portion of Houston-based Carrizo Oil & Gas Inc.’s interests to create a 60/40 joint venture with Carrizo in the Marcellus. This followed previously announced joint-venture transactions Reliance completed with Pioneer Natural Resources in the Eagle Ford and Atlas Energy in the Marcellus.

Not one to stand still, Chesapeake purchased 500,000 Marcellus, Utica and Trenton-Black River acres in Pennsylvania, Ohio and New York from Anschutz Corp. for $850 million.

Gulf of Mexico picks up

With the impacts from Macondo only beginning to be felt, various companies began considering the role the Gulf of Mexico might play in their portfolios. In addition to Apache’s acquisition of Mariner Energy Inc., and McMoRan’s shelf buy from Plains, there were a few other compelling transactions.

Energy XXI, Houston, another company that built its portfolio through well-timed acquisitions, completed a $1.01-billion purchase of ExxonMobil’s Gulf of Mexico shelf properties.

Japan’s Marubeni, which has a tightly focused acquisitive history in the Gulf deepwater, also was able to benefit from BP’s need to raise cash, buying four deepwater properties from BP for $650 million.

These could be just the first few transactions of many more to come following the Macondo blowout, as companies grapple with the new regulatory and operating environment.

Don’t forget the MLPs

The largest upstream master limited partnerships (MLPs) also made major acquisitions during the second half of 2010. In what could be an emerging trend in the more mature shale plays, EnerVest Ltd., Houston, acquired Barnett shale-focused Talon Oil & Gas Corp., Dallas, for $967 million. With the purchase, EnerVest Energy Partners (EVEP) announced it was taking a 31% interest in the transaction for $300 million.

Another serial acquirer, Linn Energy LLC, Houston, kept up its acquisitive ways with a total of $352 million in three separate transactions in the Permian Wolfberry trend.

Vanguard Natural Resources LLP, Houston, announced that it was purchasing from Denbury Resources Inc., Dallas, Denbury’s 47% stake in Encore Energy Partners LP (the MLP interests owned by Encore when it was purchased by Denbury in 2009) for about $380 million.

As investors continue to seek yield, and the resource plays are developed and mature into predictable, low-decline-rate production, the MLPs will play an increasingly larger role in the transaction deal flow.

The ratio between the three-year oil and gas strips is at an unprecedented nearly 20-to-1.

Where to from here?

There is still a great deal of interest in U.S. shales, both oil and natural gas. Over a long period of time, shale-gas deal flow will parse into two segments. The first is a continuation of the current deal flow, with new entrants in joint ventures teaming with operators seeking capital in the early stages of development.

The second phase is ongoing consolidation of assets in the more mature shale plays. Early indicators in the past few months include the ExxonMobil and Petrohawk Fayetteville transaction and the Talon Oil & Gas Corp. and EnerVest/EVEP deals.

“Me too” deals will also follow. The voracious appetites of China and India will drive multiple entities in each country to complete deals. CNOOC and Reliance have closed U.S. purchases, and competitors in the home countries will be pushed by the governments to do likewise.

On a broader scale, many Asian countries have massive appetites for energy and see the value in investing in hard assets to address energy demand. In addition to China and India, expect Japan, Korea, and perhaps others to step up activity.

Private equity will also continue to show increasing interest in energy investments. While the specialist funds from EnCap Investments, NGP, Kayne Anderson, Quantum Energy Partners and others have historically focused on energy, many of the “generalist” funds in New York and elsewhere have turned up their focus on energy.

Gulf of Mexico activity will thrive as well. As new regulations are established and the new operating environment is understood, buyers and sellers will be ready to do deals again. Expect to see portfolio shifts in and out of the Gulf as companies make strategic decisions in 2011.

Finally, pricing outlooks will continue to drive the deal flow. The worldwide oil price seems to have upward lift and oil opportunities will remain attractive. Natural gas prices may continue weak in the near term as the excess supply of gas is worked off. Hopefully, we can have a meaningful discussion with our politicians on the best energy supplies in the near future, and natural gas will find its rightful place at the top, perhaps substituting for oil as fuel for trucks and other fleets.

It all translates to keeping future deal flow interesting.