28 June 2012

There's oil in them thar deals

Just a few years ago, the Eagle Ford Shale play in Texas was largely unheard of in mainstream M&A dealmaking, with only independent exploration firms venturing to tap its unknown resources. Today, there are more than 200 companies and lease operators active in the region, all seeking to take advantage of the most active shale play in the world, according to a website devoted to the reserve.

Eagle Ford is an example of what is termed an ‘unconventional’ play, which has gained in popularity as the supply of conventional oil and gas reserves becomes stretched. The deposit in Texas is a geological formation below the Austin Chalk, for which the play is considered to be the direct source of hydrocarbons, and it produces dry and wet gas, natural gas liquids such as ethane, butane and propane, condensates and oil.

PetroHawk Energy is widely acknowledged as the first company to have started drilling the original Eagle Ford Shale wells back in 2008. Since then, more and more businesses have got in on the act, with M&A activity becoming increasingly feverish in the last couple of years. Little wonder, as the play has brought more than USD 25,000 million to the South Texas economy. According to a report by Global Data, M&A and asset transactions worth USD 15,000 million have been signed under the Eagle Ford shale play since 2010, a trend which is expected to continue in the near future.

In 2011 BHP Billiton acquired PetroHawk Energy in a whopping USD 15,100 million deal that gave the Anglo-Australian group a key position in the shale reserve. Indeed, PetroHawk’s position in the region was a primary factor in BHP’s decision to buy the company, given the US firm’s strategic position in two of the key areas in the region, namely the Black Hawk and Hawkville oil fields. The mining giant paid PetroHawk shareholders USD 38.75 a share in its takeover offer, a 65 per cent premium, and the deal marked the second-largest in the unconventional resources sector after the USD 41,000 million purchase of XTO by ExxonMobil in 2009.

Another major Eagle Ford Shale deal in 2011 was Marathon Oil’s USD 3,500 million purchase of acreage in the reserve from Hilcorp Resources. Marathon already had a presence there, and increased its holding to more than 285,000 acres through the deal, putting it in the top five operators in the area by acreage. It also demonstrated the company’s commitment to Eagle Ford, and secured its position as a significant player in the region for the foreseeable future.

That same year, Anadarko Petroleum formed a USD 1,550 billion joint venture with Korea National Oil in the shale play, which highlighted a growing appetite among international companies to get a foothold in the region.  Another deal involved a partnership between Norwegian oil concern Statoil and US group Talisman to acquire 97,000 acres in Eagle Ford from Enduring for USD 1,325 million in 2010, which was also the year that India’s Reliance Energy bought a 45 per cent stake in Pioneer Natural Resources’ shale gas field for USD 1,300 million. Not to be outdone, Chinese state-owned oil business CNOOC picked up a 33 per cent in Chesapeake Energy’s 600,000 oil and gas lease acres in the South Texas project for USD 2,160 million last year.

Proving that interest in the Eagle Ford Shale play is showing no sign of waning, several deals have been announced or completed already this year. In March, Howard Energy announced an agreement to acquire substantially all of Meritage Midstream Services’ gas collection assets in the region, and Swift Energy has just signed a gas gathering agreement with Eagle Ford Gathering, a joint venture between Kinder Morgan and Copano Energy.

As with any natural resource, supply is not infinite and at some point M&A activity in Eagle Ford will also dry up. However, there is no sign yet that the appetite for big-value deals in the region is diminishing, and with the added economic benefits – including job creation - which come with oil and gas exploration and production, companies seeking opportunities to tap into the reserve’s rich resources will likely be welcomed with open arms for many years to come.

Zephus Ltd