Weekly Update: SandRidge Energy grabs Korea opportunity

By Eoin Coyne
Evaluate Energy

SandRidge Energy completed a major deal this week with Korean investment firm Atinum Partners, to fast track the development of its large holding in the Mississippian horizontal oil play. The deal will involve Atinum paying $250 million up front and another $250 million in a cost carry for a 13.2% interest in 860,000 acres. The Mississippian play in Oklahoma and Kansas is an oil weighted play that SandRidge aims to develop using relatively cost efficient horizontal drilling techniques.

For SandRidge, the move continues their strategy of shifting the focus of production away from gas and its continuingly low realizations, towards more prosperous liquids production. In Q3 2008, SandRidge’s production profile was weighted 88% towards gas. Since this time, it has shifted for 11 consecutive quarters to be only 51% weighted towards gas in Q2 2011, and the company is now teetering on the edge of having the majority of its production composed of oil and NGLs. For SandRidge, the partnership can be seen as a step in the right direction for their large debt-to-equity ratio, especially at a time when the cost of debt is likely to rise. 

Shareholders however reacted with a large sell off that pulled down the share price by 13% on the day of the announcement, followed by another 13% drop at the time of writing. In a tumultuous week on the equity markets, its unclear how much of the drop was attributable to the deal, the below par Q2 results announcement of SandRidge or the mass sell off that virtually the whole energy sector endured following increased fears over global debt and a drop in oil prices.

Other announced deals in the E&P sector were thin on the ground this week with the next highest deal valued at just $57 million. There were two significant refining deals that closed however, with Valero completing a $730 million acquisition of Chevron’s Pembroke refinery in Wales and Essar Group acquiring the Stanlow refinery in England from Royal Dutch Shell for $350 million. There has been a long period of correction in the balance of supply and demand of petroleum products in the US and Western Europe which is now bearing fruit. Following a sustained drop in supply from the mothballing or permanent closures of refineries, margins have risen to the point where strong profits are again being made in the sector.

In another deal closure, Petronas and Progress finalized their $1.1 billion joint venture in the Montney shale play in Canada. The partnership will primarily utilise Petronas’ investment to accelerate development of Progress’ shale assets. In addition to this the experience in LNG projects that Petronas has gathered will be crucial as the JV looks to launch a new LNG exporting terminal on the west coast of Canada to capitalize on the global disparity in gas realizations.

Magnum Hunter Resources entered into a deal to increase their interest in a 15,500-acre field in the Williston basin of North Dakota to 95% with a $57 million purchase. The reserves associated with the field resulted in an acquisition cost of $22 per proved boe. 

The next largest acquisition came from Rex Energy spending $40 million on 11,000 acres in Ohio in the  Utica Shale Play. The play was already heavily featured within industry news recently after Chesapeake, a leader in the play with 1.25 million acres, reported that they had received positive results from a variety of recent wells. Fundamentally the play was reported as being liquids rich similar to the Eagle Ford but “economically superior” to the company’s assets in the  Eagle Ford Shale. Rex Energy’s acquisition works out at $3,600 per acre, far greater than the average $1,400 per acre that Chesapeake acquired its position for but this value is still far lower than what the assets will be worth if proven to be even close to the performance of the Eagle Ford play in Texas.

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