North America is not a "Ponzi scheme" as some analysts claimed back in 2009. The facts also prove that the shale gas is not reminiscent of Enron as an executive of the energy industry claimed a few years ago. Here are some chilling excerpts:
- "The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work," an analyst from IHS Drilling Data, an energy research company, wrote in an email on Aug 28, 2009.
- "And now these corporate giants are having an Enron moment," a retired geologist from a major oil and gas company wrote in a February 2011 email about other companies invested in shale gas. "They want to bend light to hide the truth."
- "Money is pouring in" from investors even though shale gas is "inherently unprofitable," an analyst from PNC Wealth Management, an investment company wrote to a contractor in a February 2011 email. "Reminds you of dot-coms."
I do not know whether these analysts and executives are in the jobless claims list currently after such grossly failed statements. The thing is the shale plays are acquisition targets as they have been profitable and thus they are here to stay. As no article has been released thus far to capture all the transactions between the foreign suitors and the North American operators, I thought to write an article to summarize all the M&A activity during the last 2 years. The North American oil and gas plays get hotter every month.
The Canadian-based acquisitions
1) All started when the South Korea's state-run Korea Gas (Kogas) signed an agreement with Canadian independent gas producer Encana (ECA) to jointly develop three unconventional gas fields in British Columbia in Canada. Kogas paid almost C$7,300 per acre and acquired a 50% interest in the fields. Kogas would invest US$1.1bn over the next five years to jointly develop 720sq km in Encana's Montney and Horn River shale plays in Northeastern BC.
2) In 2011, South Africa's Sasol (SSL) purchased a 50% net working interest in the Canadian Talisman (TLM) Montney assets for C$1.05 billion. Sasol had also purchased a 50% net interest in Talisman's Farrell Creek Montney properties west of Fort St. John in December 2010. The Canadian Terra Energy (TTRHF.PK) which also holds a significant (130,000 net acres) Montney land, points out at its corporate presentation that Sasol paid a whopping C$38,000/acre for this liquids rich Montney land. If we compare this deal with the aforementioned deal of KOGAS, we conclude that Montney land's value rose big in just one year.
3) Sinopec (SHI) China's biggest refiner, agreed to buy Canadian Daylight Energy for C$2.2 billion ($2.1 billion) in cash, gaining Canadian oil and shale-gas reserves in its largest acquisition in late 2011. The state-owned Chinese company offered C$10.08 a share for the Calgary-based Daylight which was a 70% premium than Daylight's average price during the past 20 trading days. The takeover gave the Beijing-based company access to more than 300,000 acres of land in areas rich with oil and natural gas.
4) Malaysia's state-owned oil and natural-gas company Petronas, agreed to buy the Canadian Progress Energy resources (PRQNF.PK) for C$4.8 billion (US $4.8 billion), in its biggest deal as it moves to export Canadian gas from Progress's Montney land to Asia. Petronas offered C$20.45-a-share for Progress Energy, 77% more than its close before the deal. Including convertible debentures, the deal is valued at about C$5.5 billion, Calgary-based Progress Energy. Progress is the largest holder in the Montney shale-gas area of British Columbia.
5) The Chinese oil producer CNOOC (CEO) expanded its footprint in North America's energy market with a $15.1 billion acquisition of Nexen (NXY), a Canadian company. Nexen's assets in North America include exploration and development in the Gulf of Mexico and shale oil development in British Columbia. Nexen also has operations in the North Sea off the coast of Great Britain and off the coast of Nigeria.
6) The Indian Reliance Industries inked joint ventures with US based Chevron (CVX), Carrizo (CRZO) and Pioneer Natural Resources (PXD) in 2010. Acquisition of shale gas assets has been a significant venture for RIL and in hopes of transforming itself into a global oil and gas developing enterprise in the coming years, Reliance is on the lookout for additional global opportunities and for extending a hand of partnership to leading oil and gas developing firms of the world. By adding reserves of natural gas trapped in overseas shale gas assets, Reliance will be able to add to its domestic fuel output substantially. The billionaire Mukesh Ambani who leads Reliance Industries Limited (RIL) is eyeing shale gas assets in the resource-rich regions of Canada currently, after having successfully acquired and developed similar shale gas assets in Pennsylvania and Texas in the U.S. last year. RIL, one of the top prospects, is presently studying Canadian shale gas assets and evaluating the possibility of a partnership with its energy firms.
7) Exxon Mobil Corp. (XOM), through its subsidiary Exxon Mobil Canada Energy, signed an agreement to acquire Calgary-based oil and gas exploration and production firm Celtic Exploration Ltd. (CEXJF.PK) from Fidelity Management & Research Co. and other investors for $2.9 billion in cash on Oct. 17, 2012. The Canadian Celtic Exploration Ltd holds leases in Alberta's gas-producing Duvernay and Montney formations.
The US-based acquisitions
1) With the acquisition of Chesapeake assets in the Fayetteville Shale ($4.75 billion) in early 2011 and the acquisition of Petrohawk ($12.1 billion + $3 billion in debt) in 2011, BHP has joined the ranks of non-US companies buying up shale resources in North America. This way BHP decided to diversify from minerals and mining into oil and gas. Essentially, with the acquisition of Petrohawk, the Anglo-Australian BHP has acquired acreage is in the gas rich Haynesville Shale (225K net acres) and Lower Bossier Shale (120K net acres), a condensate/wet gas position in the Eagle Ford Shale (332K net acres), and an oil rich position in the Midland and Delaware Basin (325K net acres, combined). As of their most recent investor presentation, Petrohawk had proved reserves of 3.4 Tcfe with an additional 27.4 Tcf + 406 Mmbc + 495 Mmbngl of risked resource potential. One last important item to note is that BHP not only bought Petrohawk's assets, but also bought their people and technology. Petrohawk has been one of the innovators in shale gas drilling and with the acquisition, BHP quickly moves ahead of the learning curve.
2) The Norwegian Statoil (STO) also announced recently the acquisition of Brigham getting unconventional oil expertise as Brigham operates in the Bakken formation of North Dakota. The deal was an all-cash tender offer of all outstanding Brigham shares at $36.50 / share totaling $4.4B. Statoil gains a top position in arguably the premiere unconventional oil play in the US. Over 3,000 Bakken wells have been drilled since 2004, with 98 being Brigham operated. The Brigham Williston Basin position entails 235,200 net "core development" acres and an additional 140,600 "future development" acres. In their October 5th presentation Brigham noted 794 net remaining locations in their core area. Statoil will be busy for years in the Bakken, even with wells per year at 140. Much has been made of the Statoil technical expertise and how the Brigham technical culture is a good fit. Drilling info data also shows Brigham's 30-day peak oil rate is 80% above the average. The Brigham type curve shows a peak monthly oil rate of 514 BOE/D.
3) The Chinese giant CNOOC has done two JVs with Chesapeake (CHK). In 2010 it bought a 33% position in Chesapeake's Eagle Ford shale position for $1.1 billion. Then in 2011 it added a 33% stake in Chesapeake's Colorado acreage in the Niobrara shale for $1.3 billion.
4) In early 2012 Devon Energy (DVN) signed a JV agreement with the Chinese petrochemical company, Sinopec, in a $2.5 billion deal that gives Sinopec a one-third stake in 5 U.S. emerging plays. These include the Mississippi Lime, Niobrara, Utica, Tuscaloosa Marine, and Michigan plays. Sinopec International Petroleum Exploration & Production Corp, a unit of Sinopec, will make a $900 million cash payment upon closing of the deal and pay $1.6 billion in the form of a drilling carry. Devon expects the entire $1.6 billion designated for drilling costs to be spent by the end of 2014. Through 2012, the companies expect to drill about 125 wells in the five plays.
5) The latest JV agreement of Aug 2012 involves Japan's Sumitomo Corp. in a $1.4 billion deal with Devon. The agreement entitles Sumitomo to a 30% stake in 650,000 net acres in the Permian Basin prospective to the Cline and Midland-Wolfcamp shale. Sumitomo has agreed to invest in the non-operated interests of the project, including leases, existing wells, and facilities. Drilling activities are expected to last over a 15 year period, while the entire project life is estimated to be more than 30 years. This will enhance the company's capital efficiency, future returns and overall financial strength, according to Devon Energy CEO, John Richels. The transaction is expected to close in late September when Sumitomo agreed to pay $340 million in cash and another $1.025 billion in a drilling carry, which would cover 70% of Devon's capital requirements. This is not the first U.S. JV in which Sumitomo has been involved. In 2009, Sumitomo was the first Asian company to participate in shale gas development in the Barnett. The next year, Sumitomo also moved into the Marcellus, striking up a JV there.
6) Another "landing" on a US-based property took place few weeks ago when a Chinese company paid $27.5M and two Indian ones paid $82.5M for a 10% and a 30% stake respectively in Carrizo's Niobrara land. Haimo Oil & Gas LLC ("Haimo"), a subsidiary of Lanzhou Haimo Technologies Co. Ltd., a company formed under the laws of the People's Republic of China will acquire an undivided interest in approximately 6,000 net acres located primarily in Weld and Adams Counties, Colorado along with associated infrastructure and production of approximately 185 Boe/day for an all-cash payment of $27.5 million. Oil India Ltd. and Indian Oil Corp. which bought the 30% stake said they intend to invest another $230 million over the next several years to develop the Niobrara acreage. Following the closing of these transactions late in the fourth quarter of 2012, the joint venture interest ownership participations in Carrizo's Niobrara development activities will stand collectively at 60% Carrizo, 30% OIL/IOCL, and 10% Haimo.
Canadian Oil Sands are out of favor
Apart from the 2011 deal when the Chinese CNOOC spent $2 billion to purchase the Canadian oil sands operator OPTI Canada and the Sinopec $4.65 billion agreement to buy a stake in Syncrude Canada in 2010, the M&A deals favor oil and natural gas over the expensive oil sands of Canada. The Asian state-owned oil companies are planning in a very holistic way for energy demand over the next few decades and North American gas is cheap if a company wants to add reserves. Oil sands projects are too big in scale, in terms of advanced investment and the slow pace of return and scale of the infrastructure building as they will require C$23 billion this year in investments, according to the Canadian Association of Petroleum Producers. This is why the foreign companies are holding off on oil sands purchases but they are eyeing Western Canadian natural gas reserves as well as conventional oil deposits instead to quench current supply shortages said Wenran Jiang, a University of Alberta professor and adviser to the Alberta government on Asian investment. Price discounts for Canadian heavy crude, made from oil sands bitumen, when compared to prices paid for Brent, the international benchmark, are also working against oil sands investments. U.S. energy companies ConocoPhillips (COP), Marathon Oil Corp. (MRO) and Murphy Oil Corp. (MUR) said recently they are all considering divesting oil-sands assets amid industry concerns about project cost overruns and discounting of Canadian crude prices as export pipeline capacity is squeezed.
The what-to-do list
The consolidation of the oil and the natural gas assets in North America is real and ongoing and the question is "who is the next acquisition target?" How can the investor really benefit from this M&A activity and this condensed knowledge above?
I am not a fortune teller so I have no idea which company is going to be the next acquisition target in Canada or US.
As a retail investor the only thing I can do to exploit this knowledge above is to buy undervalued energy companies with proven land and rich neighbors. These rich neighbors will expand their assets sooner or later. In addition, I buy companies which are in the exploitation phase and they are not in the exploration phase for an unknown oil or gas formation.
That being said, I like the following formations of North America as they have very successful drilling results as of today:
1) The Beaverhill Lake formation in Alberta.
2) The Bakken formation in North Dakota.
3) The Montney formation in British Columbia/Alberta.
I also like the following companies which operate in the aforementioned formations, as these producers are very undervalued and they have rich and "aggressive" neighbors:
1) Second Wave Petroleum (SCSZF.PK) is profitable, it produces around 3,000 boepd and it has a $60,000 per boepd (80% oil) valuation currently. The market cap is just 1,5x the FFO annualized and PBV=0,6. The biggest neighbors are Crescent Point (CSCTF.PK), Pengrowth (PGH) and Penn West (PWE). In addition and as of yesterday's news, Warren Buffett and his Berkshire (BRK.A) partners with Brookfield (BAM) who is the biggest shareholder of Second Wave Petroleum have a 48% stake. It remains to be seen whether and what this important deal will bring to Second Wave.
2) WPX Energy (WPX) produces approximately 240,000 boepd (78% natural gas) as of the Q2 2012 report. It trades for only $20,000 per boepd and the market cap is 3x the annualized FFO for 2012. PBV is as low as 0,6. WPX holds 86,000 net acres of Bakken land in North Dakota and its Bakken production surpassed 10,500 boepd in Oct 2012 which is a 76% increase from a year ago. The biggest neighbors are Statoil and QEP Resources (QEP).
3) Arsenal Energy (AEYIF.PK) holds 9,000 net acres Bakken land in North Dakota with a 1,400 boepd production (95% oil and liquids). The total production of the company is 3,800 boepd (75% oil and liquids) with a $39,000 per boepd valuation. The market cap is 3x the FFO annualized and PBV=1,8. The biggest neighbor is Continental Resources (CLR).
4) Terra Energy has a $19,000 per boepd (84% natural gas) valuation currently. As the natural gas price has risen significantly since July, the FFO of Q3 2012 have most likely turned positive. PBV=0,18. The biggest neighbors for its Montney land (134,000 net acres) is the Canadian division of Shell (RDS.A) and the recently acquired Celtic Exploration.