Strengthening deal market headlined by Energy Transfer-Williams midstream mega-merger
DAVID MICHAEL COHEN, PLS INC., HOUSTON
DESPITE LOW OIL PRICES,PLS reports that 2015 is shaping up to have a fair number of $10 billion-plus oil and gas "mega-deals," particularly among midstream companies. First came Energy Transfer Partners' $18 billion acquisition of Regency Energy Partners, followed by a $25 billion deal in Canada between two Enbridge entities and the $19 billion purchase of gas processor MarkWest Energy Partners by Marathon Petroleum affiliate MPLX. Punctuating these midstream transactions are the $78 billion Shell-BG merger in the integrated oil and gas space and Schlumberger's $15 billion Cameron buy in the service sector. Now Energy Transfer is at it again, having finally prevailed in its nine-month quest for rival pipeline operator Williams Cos. with an offer of $38 billion.
Combined, they will form the largest midstream company by enterprise value at $149 billion, ahead of Kinder Morgan's $108 billion. With 104,000 miles of pipeline, the new company will transport 35% of US gas and more than 15% of US oil.
In June, Williams rejected a previous all-stock offer by Energy Transfer that was worth $53 billion at the time, saying it undervalued the company. As noted by The Wall Street Journal, the new deal has the same exchange ratio as the original offer when taking into account Energy Transfer's two-for-one stock split in July. However, Williams shareholders now have the right to receive part of the payment in cash.
In the upstream space, we may be seeing early signs that sellers' expectations are dropping to a level more in line with buyers-i.e., narrowing the bid-ask spread. As an example, Reuters reports that Occidental is making the first significant Bakken divestment in this cycle, selling its Williston Basin assets to Lime Rock for about $500 million. That's a major reduction from $3 billion it was reportedly seeking a year ago or even the $1 billion it was asking this summer, according to a Simmons & Co. analyst note. It should be noted that Oxy's acreage is primarily in Dunn and Stark counties, North Dakota, far from the center of industry drilling in Williams and McKenzie counties.
Encana continues to tighten its focus on the Montney, Duvernay, Permian and Eagle Ford, striking a deal to sell its DJ Basin assets for $900 million cash to a partnership of the Canada Pension Plan Investment Board (95%) and The Broe Group (5%). In late 2013, before it spent $9 billion to enter the Permian and Eagle Ford, Encana named the DJ as one of five core growth plays. This sale, combined with an $850 million Haynesville exit in August, shows Encana is still in belt-tightening mode to strengthen its balance sheet.
Canadian upstream deal activity continues to gain momentum, although what would have been the country's biggest 2015 transaction to date now faces an uncertain future. The board of Canadian Oil Sands (COS) unanimously recommended that shareholders reject a $5 billion all-stock takeover bid from Suncor and adopted a poison pill. Although Suncor's offer represented a 43% premium to COS's prior-day closing price, the board described it as opportunistic and said it would reduce 2P reserves and production attributable to COS shareholders by 55% and 46%, respectively. COS's sole asset is a 37% stake in the Syncrude oil sands project, with working-interest 2P reserves of 1.6 Bbbl and production of 98,300 bo/d.
Suncor had more success in growing its oil sands profile by acquiring an incremental 10% stake in its operated Fort Hills project from partner Total for $275 million. The project is expected online in 4Q17 with peak gross bitumen production of 180,000 bbl/d.
Finally, Russian billionaire Mikhail Fridman's LetterOne Group sold its UK North Sea fields for an undisclosed sum to chemical conglomerate Ineos after the UK government ordered it to unload the assets because of the risk of further sanctions on Russia. LetterOne immediately turned around and struck a deal to acquire E.ON's Norwegian assets for $1.6 billion, maintaining a strong North Sea profile despite the setback. The UK assets were part of LetterOne's $5.6 billion acquisition of RWE Dea in 2014.
