With Reliance and Quicksilver (KWK) honing in on a Horn River Basin Joint Venture and this being Reliance's third major deal within the past 4 months, I wanted to look back at what the major acquisitions consisted of in the top 5 shale basins since the natural gas price collapse in 2008. There have been between 15-20 major natural gas shale deals since the peak of natural gas prices two years ago. All but one of these pretty much had the same structure. The one exception to this was Bob Simpson’s XTO merging with Exxon Mobil (XOM) a month before he was to be one of the lead backers in a consortium to buy the Texas Rangers. This clearly wasn’t the only reason he sold the whole company but it had to be a pretty nice job to fall into with the most anti O&G administration at the helm in Washington since Jimmy Carter.
Every acquisition in this category from July 2008 to present was a foreign company investing in a piece of a domestic company’s shale acreage with some upfront money and a carry of future drilling costs which the industry has dubbed a 'Joint Venture'. The domestic players were nowhere to be found after Plains Explorations's (PXP) deal in late June of 2008. Yes, there have been other large deals like KKR recent announcement to buy out Hilcorp Energy’s Eagle Ford development, but that was funded by Shell (RDS.A) buying out their Marcellus play in East Resources. There have also been other American resource companies buying out acreage in the shales, like CONSOL’s acquisition of Dominion but they’re really a coal company that was trying to break into the natural gas business. The rest have been large International oil companies paying down smaller companies debts and capital expenditures in these Joint Ventures.
Why is it that the 5 largest European oil companies have all made significant investments in America’s future natural gas production, but only one of our top 5 has taken the plunge? In true American fashion it seems we have yet again turned to our best and brightest to financially engineer foreign investment into the United States.
I’m specifically talking about Chevron (CVX), ConocoPhillips (COP), Marathon (MRO), and Occidental (OXY). The 2nd through 5th largest American oil companies respectively have a little bit of exposure, but nothing to where they could benefit from producing gas on the economies of scale that generate their value. In fact the top 4 American oil companies are all proportionately larger players in Poland’s Silurian shale play than anything stateside.
If I were playing one of these companies’ hands, here is what I am thinking. I see all of these foreign companies coming over here obviously paying a premium to learn how to drill this stuff, that’s nothing new. They’re justifying it to their shareholders (their taxpayers in many cases) as a learning opportunity that they can take to the next international shale rush, which may or may not be in their backyard and/or homeland. I know most companies shopping their position are strapped for cash and will likely not be able to hold anywhere close to all of their leases. Now why would I try and get in a bidding war with a company who’s just trying to send their foreign engineers and geologists over to basically go to shale basics 101, and has extremely deep pockets? I’ll just choose to wait until a couple years down the line, when a bunch of the leasehold is opening up, and the pricing environment is still sub $5 in the summer. The main reason being the foreign money had kept the drill bit going the entire time. This way I’ll be able to enter acreage positions on my own when all the independents will still be furiously trying to service their debts and scrambling to become an O&G company rather than a natural gas company that they intended on being at the outset. Working down the street would also make it a lot easier to recruit talent away from the already established players rather than working across the ocean in a country where they don’t seem to value how awesome we’re living over here.
I do like how 2 through 5 have sat back with a level of smugness and passed on all of these offers to buy acreage from the debt laden companies. I think being over here they saw firsthand what kind of leases were being taken and in what kind of rushed fashion. I felt at points in the scramble to lease, the independent gas companies almost wanted to switch their NAV to how much acreage they held rather than what kind of reserves had been booked. This probably was the definition of the counting your eggs before they hatched mindset that this segment of the oil and gas industry got swept up in. Not to say I don’t like how the Independents have handled this. Chesapeake (CHK) for example will end up coming out of this with much of their debt paid down, and one of, if not the most diversified portfolios of tier one acreage to drill in the nation. When all is said and done they’ll be able to pick and choose which huge well they want drilled, with the risk of a dry hole being at all time lows for the companies drilling the wells.
I think there will be several more foreign Joint Ventures to be had, but they’re about to realize in the next year or two what most large American oil producers did early on. Every quarter there seemed to be a huge discovery of a new shale play (that trend seems to be continuing). Independent gas companies would go out in a frenzy to out bid each other, and amass a huge portfolio of acreage under lease that even the majors and supermajors, they’d eventually be JVed with, would have a problem drilling up. The foreign money will at some point need to step back as 2 through 5 have done and decide to pace themselves.
The only real problem with all of this gas is that we can’t seem to turn on demand as fast as we can bring these monster wells on. If the foreigners don’t come to this realization is when gas prices will get extremely low for a sustained time period, and the JV will be a thing of the past and M&As will be the only deal talked about.
Look for CHK to enter a JV in the Eagle Ford and EOG to do the same with their Marcellus and/or Horn River assests next.
Disclosure: Long COP and CHK