According to Credit Suisse’s September 2012 research report titled “Oil: Fundamentals & US Oil Production Outlook,” U.S. Gulf of Mexico (GOM) production could increase by 700,000 barrels per day between 2012 and 2018.
Super majors have long since realized the future oil potential within the Gulf of Mexico. The long lead times and huge amount of capital required to drill and place Gulf of Mexico wells on production has kept many smaller independent names out of the region.
September’s been a busy month for the GOM. Two sizeable M&A transactions from independent producers were reported.
The Latest Announcement – EPL Buys Shallow Water Assets for $550 Million
EPL Oil & Gas (ticker: EPL) acquired shallow water GOM shelf interests from Hilcorp Energy GOM Holdings, LLC (Hilcorp) for $550 million. The 10,000 BOEPD (50% oil) in production and estimated proved reserves of 36.3 million (54% oil) purchased doubles the company’s current production and reserve portfolio to approximately 20,000 BOEPD and 74 MMBOE, respectively. Since 2011, this is the company’s fourth acquisition. In addition to cash on hand ($60.9 million as of June 30, 2012), the company increased its credit facility to $750 million and expanded its borrowing base to $450 million. An additional $200 million senior unsecured bridge loan has been granted which is expected to remain unutilized while EPL plans to access the high yield market for permanent financing before the closing date (late October 2012).
Based on the purchase price, EPL paid approximately $55,000 per flowing BOEPD and $15.15 per proved BOE. According to EnerCom’s database of 115 E&P companies, as of September 14, 2012, EPL was trading at an enterprise value to trailing twelve months production and enterprise value to 2011 proved reserves of $81,396 per flowing BOEPD and $25.14 per proved BOE, respectively.
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PXP Goes Deep Purchasing $6.1 Billion of Gulf of Mexico Producing Properties
A quick re-hash of a note we already posted following the announcement (read it here):
In two separate transactions, Plains Exploration and Production (ticker: PXP) purchased approximately 67,000 BOEPD (combined 84% oil and NGLs) of Gulf of Mexico production for $6.1 billion. The largest chunk, 59,500 BOEPD, was purchased for $5.5 billion from BP (ticker: BP). The remaining 7,400 BOEPD was purchased from Shell (ticker: RDS.B) for $560 million.
Based on the total purchase price, the two transactions were completed at approximately $91,000 per flowing BOEPD. According to EnerCom’s database of 115 exploration and production companies, as of September 14, 2012, PXP was trading at an enterprise value to trailing twelve months production of $92,856 per flowing BOEPD.
A Quick Comparison:
Bear in mind, PXP purchased deepwater Gulf of Mexico properties, 64% of which were proved developed producing (PDP) assets. EPL on the other hand purchased shallow water Gulf of Mexico properties, 42% of which are classified as PDP. Both transactions hold vast upside potential for future exploration, new producing zones, and recompletion/exploitation candidates.
EPL, being more acquire/exploit in nature, paid a lower price for production given that less of its acreage purchased has been de-risked and moved into the PDP category. Given that more than half of PXP’s acreage is in the PDP category, the company paid a higher price for production. Also adding to the difference in valuation id the percentage of oil associated with the two acquisitions. PXP acquired assets that were approximately 84% oil and liquids where EPL’s assets were approximately 50% oil.
Gulf of Mexico Companies to Look at:
We wanted to highlight a few companies on the Gulf of Mexico shelf that 1) are actively growing and pursing growth prospects in the shallow water, and 2) have ample running room to convert proved undeveloped reserves to the PDP category.
Energy XXI (ticker: EXXI) uses an acquire and exploit growth strategy to build a geographically focused portfolio in the shallow water GOM. The company focuses on developing the acquired properties while ramping up a complementary exploration program designed to provide organic growth for the future. Energy XXI completed five major acquisitions totaling approximately $2.5 billion since its founding in October 2005, creating a company with more than 120 million barrels of oil equivalent (BOE) of proved reserves and about 50,000 BOEPD of current production, 70% of which is oil. Approximately 30% of its reserves are classified as PUDs.
Perhaps the largest and most transformational acquisition was Energy XXI’s $1.01 billion purchase of Gulf of Mexico oil assets from ExxonMobil back in November 2010. EXXI bought approximately 20,000 BOEPD in production. The acquisition doubled EXXI’s production at the time and provided vast recompletion opportunities for the company. Since then, the company has grown production to more than 50,000 BOEPD.
Energy XXI trades for $91,212 per flowing BOE.
The other company we wanted to highlight is Saratoga Resources (ticker: SARA). Saratoga concentrates on abundant, low-risk drilling opportunities located in the transition zone off the coast of Louisiana. In some places, including the company’s Grand Bay field, approximately 64 stacked pay sands exist with wells that have been producing for over 50 years. The company owns all zones and all depths on approximately 32,000 net acres, 93% of which is held by production (HBP).
Over the last 18 months, the company strengthened its balance sheet adding nearly $182 million through three financings ($127.5 million senior notes and two private placements of common stock totaling $54.3 million). This allowed the company to pay down debt and substantially enhance its cash position to fund future growth. As the company continues to grow its oil-weighted production which will in turn drive cash flow, SARA is in a stable position to efficiently work through its low risk, abundant opportunities in the transition zone of the Gulf of Mexico.
Oil and gas revenues for Q2’12 totaled $23.8 million, an increase of 27% compared to Q2’11. The increase in revenue was primarily attributable to a 27% YOY increase of SARA’s average daily net production to 3,539 BOEPD during Q2’12. According to EnerCom’s E&P database of 115 companies, Saratoga’s 3-Year F&D cost is $5.46 per BOE compared to the database average of $25.86 per BOE.
Capital Efficiency is the measurement of cash flow generated for every dollar of investment and is calculated as (trailing twelve month EBITDA / trailing twelve month production) / 3-Year F&D cost per BOE. For the period ended March 31, 2012, SARA’s Capital Efficiency ratio was 703%. Said another way, SARA generates $7.03 for every $1.00 of investment. The average for the group is 271%.
Although the company is not active in acquiring new properties, the company has a portfolio with abundant low-risk, drilling opportunities.
Final Thoughts on the Gulf of Mexico:
We believe the Gulf of Mexico stands to see some exciting activity over the next decade. As of September 14, 2012, the GOM rig count is up 22% year-to-date (YTD). Looking at pure stock performance, the offshore drilling group of EnerCom’s database is up 22% YTD, while the land drillers are down 24%.
If the U.S. GOM production increases by 700,000 barrels per day between 2012 and 2018, the shallow water GOM and deepwater GOM E&P and OilService names could stand to benefit significantly.