Taking full advantage of bolstered revenues from higher oil and natural gas prices, integrated energy companies are revitalizing their exploration and production portfolios.
This trend is evident in a comparative-performance analysis released last month by Prudential Securities Inc., which ranked BP PLC first in E&P results out of a field of 11 major integrated firms for 1995-2000.
And the current E&P asset-buying spree was further punctuated by Amerada Hess Corp.'s announcement early last week of plans to acquire Dallas-based independent E&P company Triton Energy Ltd. in a deal valued at $3.2 billion in cash and debt.
Amerada Hess's deal comes close on the heels of similar recently announced acquisitions by majors, most notably: Conoco Inc.'s late May agreement to buy Gulf Canada Resources Ltd. of Calgary (OGJ, June 4, 2001, p. 36) and Shell Oil Co.'s failed bid for Denver independent Barrett Resources Corp. earlier this year (OGJ, May 14, 2001, p. 36).
BP tops E&P ranking
BP was recently revealed as the highest-ranking E&P company in Prudential's eleventh annual analysis of the E&P performance of major integrated oil firms. BP was followed by second-ranked Royal Dutch/Shell Group and third-ranked Conoco. E&P companies were rated using nine performance indicators with tier levels ranging from "highest" to "lowest" (see table). Conoco took first place in last year's survey (OGJ, Sept. 11, 2000, p. 38). The Prudential study rated BP in the "highest" tiers for:
- Depreciation, depletion, and amortization (DD&A) expenses, along with Texaco Inc.
- Production income, followed closely by Conoco, Chevron Corp., and Amerada Hess, each receiving "above average" ratings.
- Cash flow, closely followed by Amerada Hess and Marathon Oil Co., each given above average ratings.
- Upstream returns, along with Royal Dutch/Shell.
BP received an "average" rating in four performance indicators: adjusted production costs, production replacement ratios, finding and development costs, and discounted future net cash flow.
Over the past 11 years during which Prudential conducted its survey-1990-2000-BP received the top ranking only one other time, in 1997.
Top-tier ratings
BP received top ratings for four of the nine performance indicators.
Regarding DD&A expenses, BP showed the largest decline among its peer group-costs were down 6% vs. those in 1996. Meanwhile, companies showing the largest DD&A cost increases vs. 1996 were Chevron, up 48%; Phillips Petroleum Co., up 38%; and Marathon, up 34%.
Overall, average DD&A charges among the firms surveyed were calculated at $3.82/boe in 2000, Prudential noted. This figure was an increase of 14% vs. 1996. "In the US, DD&A rates were $4.10/boe, up 22% vs. 1996, primarily due to increases in finding and development costs," Prudential said.
Outside the US, meanwhile, DD&A costs averaged $3.76/boe, up 9% vs. 1996.
"DD&A charges in the US declined from about $4.20 in the early 1990s to about $3.50 in the mid-1990s," Prudential noted. "This trend reflects the divestment and/or write-down of properties with high capitalized costs"-a trend that reversed itself in 2000, the analyst said.
BP was among those firms showing the largest production income increases vs. those in 1996. Prudential said BP's production income was up 126%, or an increase of $5.58/boe. Other companies that showed large increases were Amerada Hess, up $4.77/boe, and Conoco, up $3.44/boe.
Regarding cash flow-defined by Prudential as net income plus DD&A added to after-tax exploration expenses-BP showed a 70% increase, or a rise of $5.40/boe, vs. 1996 levels. Also showing large cash flow increases were Amerada Hess, up $4.94/boe, and Phillips Petroleum, up $3.85/boe.
"In 2000, [average] cash flow was $11.36/boe, up $3.81/boe...vs. 1996," Prudential said. "As was the case with production income, the primary drivers for the increase were higher oil prices and higher US gas prices."
When considering upstream returns-or "cash out" as a percentage of "cash in"-Prudential said that the 11 industry peers generated cash flow of $11.36/boe produced in 2000. "This was 240% of the average cost of replacing production through acquisition, exploration, and development over the prior 5-year period," the analyst said.
BP's upstream returns in 2000, Prudential found, were up 341%. Other E&P companies showing increased upstream returns in 2000 were Royal Dutch/Shell, up 367%, and TotalFinaElf SA, up 294%.
The group of companies generated total cash flow of $251 billion over the 5-year period, Prudential calculated. Nearly 86% of this amount was reinvested in the upstream sector.
Amerada to buy Triton
Amerada Hess's bid price for Triton includes the assumption of $500 million of Triton debt. Under a definitive agreement, Amerada will pay $45/share for all outstanding common and convertible shares of Triton stock.
The offer represents a premium of 50% over the July 9 closing price of Triton shares and 88% of Triton's 52-week share price high, Amerada Hess said. The transaction-which has received approval from both companies' boards-is expected to close in the third quarter.
In addition, Amerada Hess said it had an "irrevocable commitment" by Hicks, Muse, Tate & Furst Inc. to sell its 38% ownership stake in Triton. The purchase price of reserves, which includes recent discoveries, is $9.79/boe for proved reserves and $5.66/boe for proved and probable reserves, Amerada Hess reported.
Deal benefits
Amerada Hess said the acquisition of Triton would continue the integrated firm's transformation into a company more heavily weighted toward E&P operations from one that is balanced roughly 50-50 between refining and marketing (R&M) and E&P ventures.
John Hess, Amerada Hess chairman and CEO, said that the company has been moving toward enhancing its E&P holdings over the last 5 years due to that sector's offering of "much higher, more sustainable financial returns."
In 1997, Amerada Hess devoted 57% of its capital employed to its R&M segments while dedicating 43% to E&P ventures. Following the transaction, Amerada Hess estimates that 76% of the combined 2001 capital employed will be earmarked for E&P operations.
In addition, Amerada Hess said the acquisition would accelerate and extend its production growth, provide "significant" exploration potential, help it to meet its financial goals, and enhance its competitive position.
CEO Hess said, "The acquisition... strengthens our exploration and production business, gives us access to long-life international reserves, substantially increases our production growth, and provides significant exploration potential. It improves our competitive position in a consolidating industry while being accretive to our estimates of earnings and cash flow per share for 2002."
Hess said the acquisition will increase the company's production from 425,000 boe/d to 535,000 boe/d in 2002 and more than 600,000 boe/d in 2003. He also noted the deal "makes Amerada Hess one of the largest global independent exploration and production companies with the scale to access a broader range of investment opportunities that meet our financial goals."
The combined companies anticipate a total after-tax savings of $33 million. At closing, on a pro forma basis and based on a $24/bbl WTI oil price, Amerada expects a yearend debt-to-capital ratio of 52%. At yearend 2002, this ratio is expected to decline to 45% and to decrease the next year even further to 36%.
International draw
The deal will increase Amerada Hess's international reserves, as well as better balance its portfolio, the company said. Amerada Hess-which operates largely in the US, the UK, Norway, Denmark, Brazil, Algeria, Gabon, Indonesia, Azerbaijan, Thailand, and Malaysia-will combine its assets with Triton's wholly non-US portfolio with holdings in West Africa, Latin America, and Southeast Asia.
Based on midyear estimates, following the acquisition, Amerada Hess said 88% of its proved reserves would be contained in four core areas: the North Sea, 40%; the US, 22%; and in Africa and Southeast Asia, each with 13%. And after closing the purchase of Triton, the company noted that it will hold 1.4 billion boe in reserves.
Regarding its international operations, CEO Hess said that Triton's assets in Equatorial Guinea had the highest "real growth potential," and was where the "real excitement" of the deal lay.
"Equatorial Guinea is one of the low-cost, favorable economic provinces of the world to do exploration and production," Hess said. "And Triton's holdings have a lot of upside."
Triton has made three oil discoveries on Block G off Equatorial Guinea. Pro- duction is under way from the Ceiba field, about 35 km offshore, from a floating production, storage, and offloading vessel. Triton holds an 85% working interest in Block G and the adjacent Block F and is operator of both blocks. Seven wells are to be drilled on these blocks in the next 12 months, Amerada Hess said.
Triton also holds a 25% working interest in Block L, which lies next to Blocks F and G. One well will be drilled on this block this year, the companies said.
Triton and its partners have explored only10% of the 1.8 million net acres it holds off Equatorial Guinea, which leaves "a lot of running room," Hess noted.
Reactions
Financial analysts have readily contemplated the aquirability of Triton over the years. In 1998, for example, PaineWebber speculated that the independent would fetch a price of $45-50/share from a prospective buyer sometime during that year (OGJ, Apr. 20, 1998, Newsletter).
And earlier this year, Triton was among those E&P firms that analysts at the annual Howard Weil energy investment conference described as under the watchful eye of those companies looking for strategic acquisitions (OGJ Online, Mar. 28, 2001).
John B. Parry, an analyst for John S. Herold Inc., said Amerada Hess's deal brings the integrated oil company the increased exploration prospects that it had been seeking.
"[Amerada] Hess was following a flat production profileellipse[and] was trying to expand internationally," Parry said. "This deal really puts them on the map compared to where they had been previously. It's ironic that a little company like Triton can do that for [Amerada] Hess."
Triton's holdings in Colombia, West Africa, and the Malaysia-Thailand Joint Development Area especially were attractive to the acquiring company, Parry noted. He called Triton "a unique independent," known for its finding major fields internationally.
Meanwhile, Triton shareholders will benefit from Amerada Hess's "deep financial pockets," Parry said. "The prospects will be able to proceed faster. Triton shareholders are going to have a lot fewer financial headaches."
Three years ago, Triton restructured to cut capital spending and improve cash flow. As a result, Triton took a $72 million charge for withdrawal from exploration projects (OGJ, July 27, 1998, p. 36).
Steve Enger, analyst for Petrie Parkman & Co., agreed the key behind the deal was growth potential in both production and reserves for Amerada Hess.
Triton's prospects off Equatorial Guinea hold the promise of "being a home run," Enger said.
Last month, Triton made another discovery on Block G off Equatorial Guinea that found reservoirs similar to those of La Ceiba field (OGJ, June 11, 2001, News- letter, p. 9).
Following Amerada Hess's announcement, Moody's Investors Service placed the acquiring company's long-term debt ratings under review for possible downgrade. The company's Prime-2 rating for commercial paper is confirmed, Moody's said. Meanwhile, Triton's senior long-term debt ratings were placed under review for an upgrade.
"...The rating review reflects Moody's concerns over the company's increased financial leverage and operating risk profile, as well as apparently high acquisition cost of $9.79/boeellipseon a proved basis," Moody's said.