2 Big Oil Deals Emphasize Opportunity in Oil Reserves, Production

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 |  Includes: ARD, DNR, FST, SD, STO
by: Toby Shute

Hot on the heels of last week's huge oil sands IPO, two significant deals in the U.S. oil patch made headlines yesterday.

First, SandRidge Energy (NYSE: SD) announced that it's snapping up Permian oil player Arena Resources (NYSE: ARD) for the equivalent of $40 per share in cash and (mostly) stock. Arena was trading higher at the beginning of the year (when oil prices were lower), but took a big tumble when it announced year-end results. Arena shareholders could perhaps question the timing of this sale -- The Wall Street Journal reports that the companies began discussing a combination in January -- but long-term owners of the stock have certainly done well. Arena shares are up several thousand percent since 2001.

SandRidge, on the other hand, has had a disastrous run as a publicly traded company. The firm used to be heavily natural-gas-weighted, but has more recently begun seeking to refashion itself as a balanced oil and gas player. Today's acquisition follows the $800 million purchase of Permian properties from Forest Oil (NYSE: FST) late last year. SandRidge shares tanked harder on that first deal, so maybe shareholders are warming up to SandRidge's oily new empire. I'm not.

Based on the $1.6 billion transaction price tag, SandRidge valued Arena at around 188,000 per flowing barrel (all oil), which is well into nosebleed territory. The reserve-based metric of $23 and change per proved barrel is less severe, but certainly no bargain considering that 62% of Arena's reserves were undeveloped at year's end. Even with the recently knocked-down price on Arena, SandRidge's transformation isn't coming cheap.

But I have warmed up to the bigger, badder Denbury Resources (NYSE: DNR). When the company acquired Encore Acquisition, I was concerned that it was leveraging up its balance sheet so soon after getting a severe spanking during the credit crisis. Yesterday's news that Denbury is selling off $900 million worth of ex-Encore properties makes me much more comfortable with the enhanced oil player's financial position.

The reserves associated with these discarded properties are 64% natural gas. Converting the 54 million barrels of reserves to a natural gas equivalent 324 billion cubic feet, we see that Denbury sold these non-core assets for $2.78 per thousand cubic feet equivalent (Mcfe). That's a very strong result, and much improved from the sale prices Denbury agreed to on its Barnett shale properties.

Both of these deals show what a huge premium oil reserves and production are getting in the marketplace today. Investors might want to think about taking profits on hot names like Brigham Exploration (Nasdaq: BEXP) and focusing their energies on natural-gas-focused producers, which are far more likely to be underpriced today.

Disclosure: No positions