Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Flurry of M&A Activity in the Gulf of Mexico

By

While much of the mainstream media fixated on the slowdown in natural gas-focused shale plays and the risks of hydraulic fracturing, the upsurge of drilling activity and M&A in the Gulf of Mexico has received significantly less attention.

PrintPRINT
While much of the mainstream media fixated on the slowdown in natural gas-focused shale plays and the environmental risks of hydraulic fracturing, the upsurge of drilling activity and mergers and acquisitions in the deepwater Gulf of Mexico has received significantly less attention.

The change to the domestic energy picture wrought by the shale oil and gas revolution shouldn't be understated. Robust drilling in these prolific unconventional fields enabled the US to overtake Russia as the world's leading producer of natural gas and grow its oil output for the first time in decades–all while the moratorium on deepwater drilling in the wake of the Macondo blowout dramatically reduced activity in the Gulf of Mexico.

Nevertheless, despite the boom in onshore drilling, the US Energy Information Administration estimates that even with a 15 percent decline in output from the Gulf of Mexico, the prolific federal offshore region still accounted for roughly 23 percent of domestic oil production in 2011.

Although drilling in the Gulf of Mexico Outer Continental Shelf resumed when the government lifted the drilling ban in October 2010, the permitting process slowed to a crawl. The moratorium and subsequent permitting delays have continued to weigh on oil production in the Gulf of Mexico: In the first half of 2012, overall output had declined by 3.2 percent from year-ago levels.

Thus far in 2012, permitting has returned to seasonal norms. Through the end of August, the Bureau of Safety and Environmental Enforcement (BSEE) has issued 105 deepwater permits, compared to the 112 applications approved by its predecessor, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), over the same period in 2008. In 2011 BOEMRE and the BSEE issued a mere 36 deepwater permits.

The normalization of permitting volumes should accelerate drilling activity in the US Gulf of Mexico.

Moreover, the Bureau of Ocean Energy Management's (BOEM) first Central Gulf of Mexico lease sale since March 2010 attracted a huge crowd of international and independent oil and gas companies. The auction resulted in 593 bids on the 454 blocks available and netted total proceeds of about $1.7 billion, with tracts located in waters depths of at least 800 meters accounting for $1.5 million in winning offers. All of the 10 largest bids were on acreage located in deep water.

Statoil (NYSE:STO), Norway's partially state-owned oil company, took the honors for the highest single bid, offering USD157 million for Mississippi Canyon block 718. However, Royal Dutch Shell (NYSE:RDS.A) was the top bidder in aggregate, sinking $406.6 million into 24 blocks.

In recent years, much of the mergers and acquisitions activity in North America's energy patch has focused on onshore shale basins. However, deal flow has accelerated in the Gulf of Mexico, with a flurry of transactions being announced in recent weeks.

Flurry of Deals

As part of an ongoing effort to shift its focus from natural gas to oil, Plains Exploration & Production (NYSE:PXP) on Sept. 10 announced that the firm had inked an agreement with BP (NYSE: BP) to acquire oil and gas properties in the Gulf of Mexico for $5.5 million.

The transaction includes a 100 percent working interest in the Marlin, Dorado and King fields; BP's 50 percent operating interest in the Holstein property; a 33.3 percent working interest in the Exxon Mobil Corp's (NYSE:XOM) Diana-Hoover field; and a 31 percent stake in Royal Dutch Shell's Ram Powell field.

In a complementary deal, Plains Exploration & Production acquired Royal Dutch Shell's 50 percent non-operated interest in the Holstein field for $565 million, giving the mid-capitalization outfit a 100 percent working interest in this property.

The assets involved in this transaction currently flow an average of 67,000 barrels of oil equivalent per day, about 60,000 barrels of which are crude oil. Midstream infrastructure in the region has a nameplate capacity of 250,000 barrels of oil equivalent per day, ensuring that takeaway constraints won't limit any upside.

To help fund the transaction and further its strategic goals, Plains Exploration & Production disclosed plans to sell $1.5 billion to $2 billion worth of non-operated, gas-producing stakes in Louisiana's Haynesville Shale and the Madden Field in Wyoming.

These divestments, coupled with the Plains Exploration & Production's major acquisition in the Gulf of Mexico, should shift the firm's sales mix to about 89 percent crude oil in 2013, compared to about 61 percent crude oil in 2012.

Management noted that these assets likely wouldn't be for sale, were it not for BP's financial needs, and opined that the fields required only redevelopment to extend their productive lives for another decade. The firm will likely seek partners to participate in exploratory drilling that's tentatively slated for 2014 and 2015.

A week after this deal was announced, EPL Oil & Gas (NYSE:EPL), a New Orleans-based independent that changed its name from Energy Partners, agreed to pay $550 million to a division of Hilcorp Energy, the third-largest privately held energy company in the US, for properties in the shallow-water Central Gulf of Mexico.

These assets include three fields that Hilcorp Energy had originally acquired from Chevron Corp (NYSE:CVX): Ship Shoal Block 208, South Pass 78 and South Marsh Island 238. All these properties are located near EPL Oil & Gas' existing plays in the Gulf of Mexico.

This acquisition, the firm's fourth since 2011, involves an estimated 36 million barrels of oil equivalent in reserves and roughly 10,000 barrels of oil equivalent per day in production, the latter of which is about equally split between oil and natural gas.

These assets will almost double EPL Oil & Gas' reserve base to about 74 million barrels of oil equivalent per day, while its annual output will increase to more than 20,000 barrels of oil equivalent per day from about 11,000 barrels of oil equivalent per day in 2011.

During a conference call to discuss the transaction, EPL Oil & Gas' management team highlighted the longer-term opportunity to drill exploratory wells in these properties to identify new formations.

The next day, W&T Offshore (NYSE:WTI), an independent oil and gas company that traditionally has focused on the Gulf of Mexico, announced an agreement with Newfield Exploration (NYSE:NFX) to acquire all of the latter's exploration and production assets in the Gulf of Mexico for $228 million and other considerations.

Of the 78 federal offshore blocks (432,000 acres) included in this transaction, 65 of these properties are located in deep water, 10 of these fields are located on the continental shelf and three are equity interests in fields operated by other companies.

Twelve of these tracts currently produce hydrocarbons, while the other 66 blocks involved in the deal have yet to be developed. These offshore blocks, many of which are located near W&T Offshore's existing asset base, exponentially increase the firm's pipeline of exploratory projects.

Meanwhile, the developed tracts in July flowed about 8,350 barrels of oil equivalent per day. Crude oil accounted for about 37 percent of production.

The Verdict

Robust demand at the BOEM's most recent lease sale in the Gulf of Mexico, coupled with the recent flurry of acquisitions in the region, suggests that drilling activity will continue to accelerate in coming years. I continue to favor providers of marine seismic services, offshore equipment manufacturers and contract drillers, all of which stand to benefit from a tightening global market for their product offerings.

This article by Peter Staas was originally published on Investing Daily.

Below, find some more great content from Investing Daily:

Echo Baby Boomers and the Stock Market

Behind the Headlines of Today's Hottest Oil and Gas Investments

Caution, Not Panic

Twitter: @investingdaily
No positions in stocks mentioned.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE