Wiljor Posted March 11, 2015 Report Share Posted March 11, 2015 A decision by Whiting Petroleum Corp., the largest producer in North Dakota’s Bakken shale basin, to put itself up for sale looks to be the first tremor in a potential wave of consolidation as $50-a-barrel prices undercut companies with heavy debt and high costs. For the first time since wildcatters such as Harold Hamm of Continental Resources Inc. began extracting significant amounts of oil from shale formations, acquisition prospects from Texas to the Great Plains are looking less expensive. Buyers are ultimately after reserves, the amount of oil a company has in the ground based on its drilling acreage. The value of about 75 shale-focused U.S. producers based on their reserves fell by a median of 25 percent by the end of 2014 compared to 2013, according to data compiled by Bloomberg. That’s opening up new opportunities for bigger companies with a better handle on their debt, said William Arnold, a former executive at Royal Dutch Shell Plc. “In this market, there are whales and there are fishes, and the whales are well armed,” said Arnold, who also worked as an energy-industry banker and now teaches at Rice University in Houston. “There are some very vulnerable little fishes out there trying to survive any way they can.” Smaller producers with significant debt that depend on higher prices to make money are the most likely early targets for buyers such as Exxon Mobil Corp. or Chevron Corp., companies that have bided their time for years as the value of some shale fields soared to $38,000 an acre from $450 just a few years earlier. ‘Consolidation Game’ The market crash is creating “a consolidation game,” Concho Resources Inc. Chief Executive Officer Timothy Leach said on a Feb. 26 call with investors. “It’s harder to be a small company today than it has been in the past.” In the pre-plunge days, acquisitions were dominated by foreign buyers overpaying to get a seat at the shale boom table. That buying frenzy was followed by an explosion in asset sales as companies pieced together their ideal drilling portfolios. Joint ventures were a popular way of funding what seemed like an unstoppable drilling machine. Now, an expected surge of deals is more likely to feature fire sales by companies unable to pay expenses, falling asset prices and a widening division between the haves and have-nots. Heavy Debt Sellers will be companies like Whiting, handicapped by heavy debt and lacking the cash reserves or hedging contracts that would have provided some insulation from the market crash. Among the three biggest producers in North Dakota -- Whiting, Continental and Oasis Petroleum Inc. -- the value per-barrel of reserves has fallen by about half since June, the data show, meaning those reserves would cost a buyer half what they were worth eight months ago. Exxon is the only major oil company with a AAA credit rating, which gives it unparalleled borrowing power for financing deals. More importantly, the company has $226 billion of its own shares stashed away from buybacks that it could use to buy other companies. That was how Exxon paid for Mobil in 1999 and XTO Energy Inc. in 2010. Chevron holds $43 billion of its own shares in its treasury alongside $13 billion in cash, and the company has ample ability to borrow. An analysis by Wolfe Research LLC’s Paul Sankey found the likeliest takeover candidates among major U.S. and Canadian producers included Continental, Apache Corp., Devon Energy Corp. and Anadarko Petroleum Corp. Those companies are big enough to help a buyer such as Exxon gain oil reserves at a cheaper price compared to peers, Sankey wrote Feb. 2. In the headiest days of the shale-buying spree, executives including Occidental Petroleum Corp. CEO Stephen I. Chazen swore off deal-making, saying it would be more profitable to focus on developing the assets they’d already acquired. Now they’re singing a different tune. Eyes Open For the first time in years, EOG Resources Inc. Chairman and CEO William R. Thomas said Feb. 25 the company was weighing larger deals to scoop up acreage at a bargain, departing from its usual preference for more incremental purchases. Exxon Chairman and CEO Rex Tillerson suggested last week at an investor presentation in New York that the global oil giant is keeping its eyes open for opportunities in the downturn. Whiting has reached out to potential buyers including Statoil ASA about a sale, people familiar with the matter said this week. The company took on $2.2 billion in additional debt for its $6 billion acquisition last year of fellow shale producer Kodiak Oil & Gas Corp., just as crude prices had begun a decline from more than $100 a barrel to less than $50 at the start of the year. Scaling Up The Denver-based company would be an attractive target for Exxon, Chevron or Hess Corp., all of which have operations in North Dakota and would benefit from scaling up, according to a Bank of America Corp. note to investors Monday. Spokesmen for Exxon, Statoil, Chevron and Hess declined to comment on their potential interest in buying shale companies. Spokesmen for Anadarko, Apache and Devon declined to comment about their interest in selling. Buyers will probably have to use their stock to purchase smaller operators, which don’t want to take cash at the bottom of the market, said Mike Bock, co-founder of energy investment bank Petrie Partners LLC of Denver. Bock spoke generally about potential energy mergers and declined to comment specifically on Whiting, as his firm has done business with the company in the past. ‘Stock for Stock’ “Now is the time to do a stock-for-stock deal,” Bock said. “For the most part, it’s going to be unconventional players combining.” Since oil company shares have fallen alongside the market crash, an equity deal allows both buyer and seller to reap the upside when shares gain in a recovery, said Tim Balombin, an energy investment banker with Wells Fargo & Co. Whiting has fallen 54 percent since June, about the same as oil prices in that time. The Standard & Poor’s 500 energy producer index has declined 33 percent, according to data compiled by Bloomberg. As oil prices have stabilized this year, Whiting has climbed 13 percent. “The companies that have good currency in their stock are willing to deploy it aggressively,” Balombin said in a telephone interview. “The best companies that come out of these downturns come out of it bigger and stronger.” http://www.bloomberg.com/news/articles/2015-03-11/get-ready-for-oil-deals-shale-is-going-on-sale Link to comment Share on other sites More sharing options...
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