Signs of life for both US shale deals and international consolidation
DAVID MICHAEL COHEN, PLS. Inc., Houston
IN THE MOST ENCOURAGING SIGN YET this year for the US upstream deal markets, Noble Energy Inc. has agreed to acquireEagle Ford and Permian unconventional driller Rosetta Resources in a stock-and-debt deal valued at $3.9 billion. The deal will mark Noble's entry into the two most active shale plays, providing predictable production growth (along with its existing Niobrara and Marcellus assets) to balance its exploration portfolio in the eastern Mediterranean and West Africa.
A significant feature of last year's record-high $98.4 billion in US upstream deals was the prevalence of multibillion-dollar acquisitions by large-cap North American drillers to gain entry to proven shale plays that had already been leased up by early entrants. Some of the biggest of these deals were in the Eagle Ford and Permian, starting with Devon's $6 billion Eagle Ford buy from GeoSouthern Energy in November 2013 and culminating in Encana's $7 billion acquisition of Permian pure-play Athlon Energy last September.
These deals dried up as oil prices fell to the ~$50/bbl range, below the breakeven prices of all but the best shale acreage. As a result, US deal activity took a shift toward lower-risk conventional assets, which constituted two-thirds of Q1's ~$1 billion total after seven years of unconventional deals making up about half or more of deal value. On the sell-side, the widely anticipated sell-off of shale assets at rock-bottom prices has failed to materialize because shale drillers have been able to successfully tap the public markets at attractive valuations, reflecting broad-based optimism that oil prices will bounce back soon.
Whether the Noble/Rosetta deal sets a benchmark value for further US transactions remains to be seen. Rosetta was particularly ripe for a takeover after suffering a $540 million loss in Q1 and ending the quarter with net debt of $1.8 billion, significantly higher than its $1.3 billion market cap at that time. That was despite raising over $200 million in a share offering in mid-March to pay down debt. The all-stock nature of the Noble agreement also helped sweeten the deal by preserving upside for Rosetta stockholders, who are expected to own 9.6% of the combined company upon closing.
On the other hand, last month also saw two cash deals that, together with Noble/Rosetta, are the biggest yet this year in the shale plays. Diamondback Energy expanded its Permian presence into a new Lower Spraberry and Wolfcamp sweet spot in northwest Howard County, Texas in agreements totaling $438 million with privately held Cobra Oil & Gas and others. Also, SM Energy exited the Arkoma Basin and ArkLaTex region, where it held assets in the Woodford, Haynesville and Woodbine plays, via two agreements totaling $324 million. The success of the SM Energy sale apparently impressed Marathon Oil, which has tapped SM's advisor RBC Richardson Barr to stage its own Arkoma Basin and ArkLaTex exit.
Internationally, the oil and gas markets got another taste of industry consolidation following the landmark $82 billion Shell/BG deal. Mexican conglomerate Alfa and private equity-backed startup Harbour Energy launched a $5.5 billion bid to take over Pacific Rubiales, Latin America's largest non-state-owned oil and gas company. Based in Calgary, Pacific Rubiales produces over 147,000 boe/d (95% oil) almost exclusively from Colombia and has exploration interests there and in six other Latin American countries covering a total of 23 million net acres. Alfa already owns a 19% stake in Pacific Rubiales, and Alfa and Harbour offered C$6.50/share for the remaining 81%, a 39% premium to the company's prior-day closing price but still more than 70% below its high point last year.
As in many of the top international deals struck last year, the buyers here are relative newcomers to the upstream oil and gas industry. Alfa's interests are mainly in industrial businesses such as petrochemicals, auto parts and refrigerated foods. The conglomerate is hoping to expand into E&P as its home country prepares to open its nationalized oil and gas industry to private investment. Pacific Rubiales also wants to get into Mexico on the ground floor; in December it formed a 50:50 JV with Alfa to develop oil and gas projects there. Harbour was formed last summer by EIG and Asian commodities trader Noble Group to acquire upstream and midstream assets worldwide.