Deals of the Week: Premier Makes An Opportunistic Grab for Encore Oil

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by: Evaluate Energy

Premier Oil (OTC:PECO) made a timely offer for fellow North Sea exploration company Encore Oil (OTC:ENOLF) this week, for a consideration of $325 million (net of cash held by Encore). The offer per share, which has been recommended by the board, is for either £0.70 in cash or 0.2067 shares of Premier Oil, representing a 55% premium on the day prior closing price. The fact that the share price of Encore Oil has since risen to over £0.75 per share would usually indicate that an offer is expected. In this instance however, due to the highly volatile equity markets, it may be more the case that holding stock in Encore Oil acts as an effective hedge, where the holder can elect to receive stock should the price of Premier Oil rise, or elect to receive cash should the oil sector falters any further.

The timing of the deal means that even with a 55% premium, the offer is still less than half of the trading price of Encore Oil earlier in the year, which hit a year high of £1.51 in February. Despite this, there are numerous positives for the Encore shareholders, one being that they can elect to receive Premier Oil stock as consideration. This will allow them to benefit from the assumed upswing in the near future in the oil sector valuations, a belief that is likely to be held by most Encore shareholder who have held onto their stock despite the sustained price drop since April. Also they will see a faster pace of development of Encore’s key assets such as the Catcher discovery, which Premier will gain a 50% stake and operatorship in. The $483 million in cash that Premier Oil had on its balance sheet as of June 2011 dwarves the $28 million that Encore held at the same date. Had Encore continued as an independent company it's unlikely that financing on attractive terms would have been found in the current financial climate.

In the Danish portion of the North Sea, Dong Energy acquired a 2.4% interest in the South Arne field from Noreco for $75 million. The acquisition came via the exercise of a pre-emption right as part of a previously announced deal for the asset between Hess Corp and Noreco.

Heritage Oil (OTC:HGOCF) made a brave move into Libya this week, the dust having barely settled after the long drawn out civil war and eventual liberation of the country. Heritage are paying $19.5 million for the acquisition of a 51% stake Sahara Oil Services Holdings Limited. The acquisition was originally cheered by investors with a 6% rise in the share price of Heritage, but the brakes were put on when the Libyan National Oil Company denied that the deal had even been struck.

In Tanzania, two deals were reached for offshore exploration blocks prospective for gas. Royal Dutch Shell (NYSE:RDS.A) farmed into a 50% interest in Blocks 5 & 6 from Petrobras (NYSE:PBR) and in a separate deal Mubadala Development Corp farmed into Block 7 from Dominion Petroleum (LON-DPL) in a deal worth $44 million. The addition of a well financed partner in the Abu Dhabi company, Mubadala, in Block 7 was enough to lift the share price of Dominion by 20% on the day of the announcement.

In deals that closed this week, Noble Energy (NYSE:NBL) finalised their Marcellus shale play joint venture with CONSOL Energy (NYSE:CNX) worth $3.1 billion and Breitburn Energy Partners (BBEP) completed their $283 million acquisition of assets in the Green River basin in Wyoming. Both deals are highly gas-weighted and therefore susceptible to the depressed gas price in the US which currently stands at just $3.49 per mcf. Noble Energy made an allowance for this by placing a clause into the joint venture with CONSOL that cost carry obligations may be suspended whenever the gas price drops below $4 per mcf. For Breitburn, the threat of a sustained lull in the gas price has been catered for by very low acquisition metrics. The cost per proved mcf which is 59% developed is just $1.24 and added to the anticipated lifting cost of $0.83 per mcf gives Breitburn room for manuever given their most recent hedge position taken out of $4.96 per mcf.

Acquirer

Target Company

Target Business Segment

Brief Description

Total Acquisition Cost ($000)

Unspecified

G6 Rete Gas

Midstream

A consortium composed of F2i infrastructure fund, AXA Private Equity and Enel Distribution acquires Italian gas distributor, G6 Rete Gas from GDF Suez

1,082,487

Premier Oil

Encore Oil

E&P

Premier Oil acquires fellow UK North Sea explorer, Encore Oil

324,867

Dong Energy

Noreco ASA

E&P

DONG Energy acquires a 2.4% interest in the South Arne field in the Danish North Sea from Noreco. The acquisition comes via a pre-emption right that DONG Energy exercised as part of a previously announced transaction for a stake in the field between Hess Corp and Noreco ASA

75,301

Mubadala Development Company

Dominion Petroleum

E&P

Mubadala Development Company farms into a 20% interest in Block 7 in Tanzania from Dominion Petroleum

44,000

Heritage Oil

Sahara Oil Services Holdings Limited

E&P

Heritage Oil acquires a 51% stake in Sahara Oil Services Holdings Limited the holder of long term permits and licenses to provide oil field services in Libya as well as the rights to own and operate oil and gas licenses

19,500

ENAP

Government body

E&P

ENAP are awarded an exploration license for block 3 in Ecuador

18,000

Panhandle Oil & Gas

Unspecified

E&P

Panhandle Oil & Gas acquires interests in 193 non-operated natural gas wells and 1,531 acres of leasehold located in Van Buren, Conway and Cleburne Counties, Arkansas, prospective for the Fayetteville play

17,500

Unspecified

Bellatrix Exploration Ltd.

E&P

Bellatrix Exploration disposes of a non-core property located in Meekwap, Alberta

4,233

Danoil Exploration A/S

Noreco ASA

E&P

Danoil acquires an additional 0.12% interest in the South Arne field in the Danish North Sea from Noreco. The acquisition comes via a pre-emption right that DONG Energy exercised as part of a previously announced transaction for a stake in the field between Hess Corp and Noreco ASA

3,765

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.