FOCUS: UNCONVENTIONAL OIL & GAS — International investors driving unconventional oil, gas M&A

Feb. 6, 2012
Chinese, French, and Japanese companies were among recent investors making long-term financial commitments to US unconventional oil and gas plays in a trend that is expected to continue despite economic uncertainty.

Chinese, French, and Japanese companies were among recent investors making long-term financial commitments to US unconventional oil and gas plays in a trend that is expected to continue despite economic uncertainty.

State-run Oil India Ltd. (OIL) has indicated an interest in acquiring shale assets in the US and Australia. Oil India Finance Director T.K. Ananth Kumar told reporters Oil India hopes to buy shale assets worth up to $200 million. Reliance Industries Ltd. and Gas Authority of India Ltd. already have US shale gas acreage.

Kumar said Oil India prefers a joint venture partnership rather than fully owning the asset. "This is our strategy for acquisition of shale gas," he said.

Rick Roberge, PwC US principal for energy mergers and acquisitions, said international investment in US shale is well under way and likely to continue.

IHS Herold Inc. statistics showed international transactions involving US shale plays accounted for 40 deals totaling $60 billion during 2008-11 of which 33 transactions were announced within the last 2 years.

Roberge said 22 transactions involved drill-and-carry arrangements, and Chesapeake Energy Corp. was the most active player, participating in 8 deals.

"Every major global oil company is looking at US shale," Roberge said. "They desperately want a position and will pay up for it."

Roberge noted Russian investors are the lone exception, adding that Russia has a large conventional oil and gas reserve base.

Meanwhile, Asian companies have been very prominent investors in the US shale market. Roberge said Asian companies invest in US shale to acquire both financial reward and technical knowledge about unconventional oil and natural gas development.

China is very keen on acquiring shale expertise given its hope to tap into its own unconventional resources. Andy Brogan, Ernst & Young global oil and gas transactions leader, said China holds the largest estimated shale gas resources worldwide.

"If the potential in this asset base can be unlocked, this could transform the oil and gas landscape in years to come," Brogan said.

The US Energy Information Administration estimates China has 1,275 tcf of technically recoverable shale gas compared with 862 tcf in the US. The estimate was part of an analysis of world shale gas that EIA released in April 2011.

Jim Dillavou, US leader of Deloitte's energy M&A practice, said some Chinese companies have made multiple investments.

These partnerships provide US operators with capital to continue development while the drill-and-carry joint venture partners gain unconventional technical expertise.

Relationships continue evolving, he said. Recent low gas prices are unlikely to discourage international investors who already expect to wait several years for a financial return from their shale investments, he said, adding that unconventional liquids assets currently attract the keenest interest from buyers.

"Most development plans are 6-10 years at least," Dillavou said. "We see a lot of big pockets coming into this space. We haven't seen any signs of it slowing. We think it will continue for awhile."

Trend continues

The M&A trend from investors abroad into US shale continued robustly going into 2012 with three transactions announced in early January.

Total E&P USA Inc. signed a joint venture agreement with Chesapeake Exploration LLC and affiliates of EnerVest Ltd. in which Total acquires a 25% stake in Chesapeake-EnerVest holdings in the Utica shale in Ohio (OGJ Online, Jan. 3, 2012). Total paid $700 million upfront and agreed to pay up to $1.63 billion during 7 years in the form of a 60% carry of Chesapeake-EnerVest's future drilling and completion expenditures.

Devon Energy Corp. agreed to sell one third of its interest in five plays to China Petrochemical Corp. (Sinopec) for $2.2 billion (OGJ Online, Jan. 3, 2012).

Terms call for Sinopec International Petroleum Exploration & Production Corp. (SIPC) to reimburse Devon for drilling costs. Previously, Devon assembled 1.2 million net acres in the Tuscaloosa Marine shale, Niobrara, Mississippian, Ohio Utica shale, and the Michigan basin.

The Eagle Ford JV results in SIPC paying 80% of the overall development costs during the carry period, Devon said.

Marubeni Corp. subsidiary Marubeni Eagle Ford Ltd. agreed to buy a 35% stake in Hunt Oil Co.'s holdings in South Texas. Terms call for Marubeni to pay future drilling expenses (OGJ Online, Jan. 9, 2012).

The Japanese trading house said the JV with the Dallas-based Hunt plans to drill several hundred wells during 5-10 years across 52,000 acres. Marubeni and Hunt plan to jointly acquire additional Eagle Ford acreage.

Other Japanese companies also are investing in US shale plays. Corporate conglomerate Itochu Corp. was part of an investor group led by Kohlberg Kravis Roberts & Co. LP that acquired Samson Investment Co., Tulsa, Okla., one of the largest private US exploration and production companies, for $7.2 billion.

Samson has positions in oil and liquids-rich plays such as the Bakken, Powder River, Green River, Granite Wash, Cana Woodford, and Cotton Valley as well as in the Haynesville and Bossier gas shales.

Previously, Itochu became the first Japanese company to participate in a US shale oil project upon buying a 25% stake in the Niobrara shale oil play in Wyoming from MDU Resources Group.

Separately, a subsidiary of Mitsui & Co. Ltd. acquired 12.5% working interest in the nonoperated Eagle Ford shale position of SM Energy Co., Denver. Mitsui agreed to carry 90% of SM Energy's drilling and completion costs on its nonoperated acreage until it has spent $680 million for the benefit of SM Energy (OGJ Online, June 29, 2011).

Norway's Statoil ASA announced plans to acquire independent Brigham Exploration Co. for $4.4 billion in a transaction marking Statoil's entry into the Bakken and Three Forks unconventional oil plays in the Williston basin in North Dakota and Montana (OGJ Online, Oct. 17, 2011).

SandRidge Energy Inc. of Oklahoma City struck a $1 billion deal with Spain's Repsol YPF last year involving SandRidge's Mississippian oil fields.

Repsol agreed to pay SandRidge $250 million and to finance $750 million in drilling expenses over 3 years for a nonoperated stake in two areas, one straddling the Oklahoma-Kansas line and another in southern Kansas. While not shale, the Mississippian formation requires horizontal drilling and multistage fracturing. In a separate joint venture, South Korean firm Atinum Partners Co. Ltd. acquired a nonoperated working interest in SandRidge's Mississippian fields for $500 million. Atinum will pay $250 million in cash at closing. Atinum has also committed to a drilling carry obligation to pay 13.2% of SandRidge's share of drilling and completion cost for wells up to a total amount of $250 million during a 3-year period.

BHP Billiton Petroleum of Australia agreed to buy all of Chesapeake Energy Corp.'s interests in the Fayetteville shale in Arkansas for $4.75 billion (OGJ Online, Feb. 22, 2011).

J. Michael Yeager, BHP Billiton chief executive, said his company obtained an operated position in 487,000 net acres in the Fayetteville to "immediately make BHP Billiton a major North American shale gas producer. Longer term, the expertise we gain here will be usable elsewhere as we continue to grow our business."

A few months later, BHP Billiton announced an agreement to acquire Petrohawk Energy Corp., Houston, for $12.1 billion, giving BHP operated positions in the Eagle Ford and Haynesville shale resource plays and the Permian basin (OGJ Online, July 25, 2011).

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