Resource plays and capital players in the global deal landscape

Brian Lidsky, PLS Inc., Houston

PLS reports that from October 17 to November 16, global deal activity totaled $12.6 billion in 49 deals. As of press time on November 25, Q4's tally has reached $27.0 billion in 84 deals – as compared to Q3 2013's $41.8 billion in 239 deals.

Current commodity prices are driving large oily deals, particularly in the US. On November 22, front-month prices closed at $111.05 for Brent (12 month strip of $108.61), $94.84 for NYMEX WTI ($94.01 strip) and $3.77 for Henry Hub ($3.83 strip price). In this price environment, the largest prizes include Texas' Eagle Ford and Permian plays and North Dakota's Bakken.

Regarding US oil production growth, the country recently achieved a large milestone. During October 2013, production of 7.6 MMbbls/d exceeded imports for the first time in nearly two decades – 1995 more specifically. While the drill out of the US oil plays remains in its early stages, the impact will continue to be profound. And it will require tremendous capital. According to a Jefferies report, $2 trillion of capital will be needed over the next 30 years to drill over 360,000 wells. At this stage of development, capital beyond cash flow is necessary and is being provided by asset sales and public and private investors. Beyond the US, a 35% growth in global oil demand projected by 2035, will require $7 to $10 trillion of investments to bring on another 390 billion barrels, according to Chevron.

Today, capital providers include a trio consisting of large private equity firms, MLP's and Asian NOCs – a theme that has been in place for some time. To date in 2013, large US deals involving private equity include Riverstone-backed Templar Energy buying Forest Oil's Granite Wash assets for $1.0 billion. On the sell side, Blackstone-backed GeoSouthern Energy just sold a prized Eagle Ford asset to Devon Energy for $6.0 billion. Large MLP deals include Linn Energy's buy of Berry Petroleum for $4.9 billion, Breitburn's $890 million buy of Whiting's Oklahoma assets and Atlas Resource's $733 million buy of coalbed methane from EP Energy. The largest Asian NOC buys this year are in the international arena and include CNPC's (China) $5.4 billion Kazakhstan purchase from ConocoPhillips and $4.2 billion buy in Mozambique from ENI. Sinopec also bought 1/3 of Apache's Egypt assets for $3.1 billion.

Indicative of the importance of the US oil resource plays, at press time Devon Energy announced a $6.0 billion Eagle Ford buy from privately-held GeoSouthern Energy. Notables on this deal are numerous. It is the largest pure-play US resource asset transaction on record, surpassing BHP Billiton's $3.75 billion Fayetteville buy from Chesapeake in February 2011 and a defining shift for the "New Devon" as it focuses to provide multi-year, low-risk oil production growth. The acquisition is Devon's landmark entry into the Eagle Ford and brings 82,000 net acres, primarily in DeWitt County which currently has the best IP rates in the play in the Blackhawk area. PetroHawk, the company that originally initiated development in Blackhawk, was sold to BHP Billiton in July 2011 for $15.1 billion. Devon, now partnered with BHP, plans to drill out a six-year inventory with existing cash flow from the asset. After valuing the production at $4.3 billion ($81,000 multiple on 53,000 boepd), PLS estimates the remaining 62,000 net undrilled acres at $27,500 per acre. This compares to our estimate of $21,000 per acre that Marathon paid Hilcorp and KKR in May 2011 for 141,000 acres in similar Eagle Ford geography and the $11,000 per acre that PLS estimates for the same acreage in the BHP/PetroHawk deal.

In Canada, deal activity is gaining momentum with $3.8 billion in deals thus far in Q4, already surpassing the $3.7 billion in Q3. Progress Energy (a subsidiary of Petronas) paid Talisman $1.4 billion for Montney assets, which come with a $834 million third party carry. PLS values the Montney acreage at $2,600 per acre. Also in Canada, there are substantial assets for sale. Penn West recently completed its strategic review and will be selling an additional $1.0 to $1.5 billion in assets. Devon also announced it will be selling its Canada conventional gas assets which are producing 470 MMcfepd on over 4 million acres.