Weekly Update: Mitsui spends big to enter Eagle Ford

Mark Young 
Evaluate Energy

As the second quarter of 2011 draws to a close, the Eagle Ford shale play took the headlines. Mitsui & Co. has entered into an agreement with Colorado-based SM Energy Co. (NYSE: SM) to acquire a 12.5% interest in non-operated acreage in the play, gaining a net amount of 39,000 acres. The Japanese company will carry 90% of the American’s drilling and completion expenses on its non-producing land until it has spent $680m for the benefit of SM Energy, and has also agreed to pay between $20 million and $30 million to reimburse past expenditures on related midstream assets.

SM Energy has called this deal the final stage in its Eagle Ford divestiture strategy, following recent sales in Dimmit and La Salle Counties. The divestitures have provided SM with almost $1bn in funds, which it aims to use to accelerate development on the 196,000 Eagle Ford acres it has left (75% operated). Mitsui’s strategy for the past few years has been to create a core business segment with US shale oil and gas assets and gain technical expertise from its partners; Mitsui also holds an interest in the Marcellus play following a 2010 transaction with Anadarko. This is the second high-cost Eagle Ford acquisition by a Japanese company in as many weeks. Mitsui is spending around $18,000 per acre in this acquisition and last week, JGC Corp. paid TriTech over $10,000 per acre for 6,300 net acres of undeveloped Eagle Ford land.

It was also a busy week further north in the Bakken play. Kodiak Oil & Gas Corp. completed its acquisition of 25,000 net Williston basin acres in McKenzie County, North Dakota, for approx. $87 million in cash and stock. The land is close to the company’s core Koala, Smokey and Grizzly project areas, and takes Kodiak’s presence in the basin up to 100,000 acres.

MDU Resources and Reliable Energy also acquired Bakken land this week. MDU acquired 20,000 acres in Montana, and Reliable acquired 5,700 net acres over the border in Saskatchewan and Manitoba, both for undisclosed amounts. These acquisitions have brought the total amount spent in the Bakken in the first 6 months of 2011 up to around $1 billion.

Away from the shale plays, Denbury Resources was also active this week. The Texas-based company has agreed to acquire the remaining 57.5% working interest not already owned in the Riley Ridge Federal Unit in southwestern Wyoming, and an approximate 33% working interest in an additional 28,000 acres of adjoining mineral leases. The transaction cost was $191m. The Riley Ridge Unit, whilst highly prospective for natural gas, has a large accumulation of CO2, a resource Denbury has been searching for more of as it enters the tertiary stage of developing two Rocky Mountain fields, Bell Creek and Cedar Creek Anticline. Denbury plans to flood these fields with CO2 to enhance recovery, starting with Bell Creek in the next two years.

Outside of the US, it was a big week for Canadian company Parex Resources, who completed its first major acquisition since incorporating in August 2009 following Pluspetrol’s acquisition of Parex’s predecessor Petro Andina. The company has bought four blocks in the Llanos Basin in Colombia, a popular area where almost half of the 2010 Open Round licenses were awarded. Parex’s acquisition, first announced in April, was for $255 million, provides immediate cash flow and adds significant production to Parex’s portfolio; The assets currently produce 3,100 boe per day, equivalent to 50% of Parex’s total current production levels from existing assets.

Back in the US, as the battle rages on between Williams and Energy Transfer Equity LP over the acquisition of pipeline company Southern Union Company, more midstream acquisitions have taken place this week. The biggest of them is El Paso Pipeline Partners’ $780 million combined acquisition of a 28% interest in Colorado Interstate Gas Company and the remaining 15% that it did not previously own of Southern Natural Gas Company from El Paso Corp. This allows the company to strengthen its position in key areas and makes Southern Natural Gas Company a wholly owned subsidiary. Whilst it is selling the companies, El Paso Corp. will retain cash flow from them due to its general partner stake in El Paso Pipeline Partners.

Sunoco Logistics Partners LP has been similarly active this week, acquiring the Eagle Point Tank Farm and related assets in New Jersey for $100 million from its own general partner, Sunoco Inc. The midstream-focused Limited Partnership also acquired refined products storage terminal facilities from ConocoPhillips for $56 million plus inventory costs in Boston, Massachusetts.



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