M&A Activity impacted by oil and gas price volatility

Ronyld Wise, PLS Inc., Houston

PLS Inc. reports that US deal activity slowed in late May and early June as WTI oil prices rapidly descended to the low $80s from the $100+/bbl range in place since mid-February. Natural gas prices are also experiencing volatility, with near-month prices now close to $2.50 after seeing sub-$2.00 levels in April. With high price volatility and typical early summer market doldrums, it is not surprising that several deals that got done this period are special situations.

Internationally, M&A activity in this period has remained stable and is dominated by deal activity in Canada and the North Sea—though, as in the US, there is a lack of large deals. In terms of deal types, activity is well dispersed between corporate and asset acquisitions.

In terms of special situations, CO2 player Trinity CO2 Investments LLC made its upstream debut in the Permian with a $130 million purchase of SandRidge Tertiary LLC, a self-contained non-core tertiary oil recovery business unit of Oklahoma City-based SandRidge Energy. Trinity partnered with the private equity arm of Morgan Stanley in September 2010 with a goal to develop an integrated CO2 business, similar to the CO2 business model of Kinder Morgan and Oxy Permian. John Moon, partner and managing director of Morgan Stanley Private Equity, describes this acquisition as "a unique opportunity to combine an attractive upstream EOR business with Trinity CO2's strategically located CO2 pipeline and supply platform."

With the deal, Trinity CO2 purchases net production of 987 bopd (1,100 bopd gross), proved oil reserves of 24 MMbbl and the Wellman pipeline located in Terry County, Texas. The transaction brings one existing CO2 flood in Terry County and two waterfloods with current CO2 EOR pilots, one in Gaines County and one in Hockley County. The transaction metrics are $131,712 per bopd and $5.42 per bbl of proved reserves (100% oil, 66-year R/P).

In a second deal this period, MLP player Vanguard Natural Resources established a new operating area in the Arkoma basin with a $445 million purchase from privately held Antero Resources. The deal comes with a hedge book valued at $100 million. The assets are dominated by the Oklahoma Woodford shale (with some Arkansas Fayetteville shale assets included) and in total produce 76 MMcfed (91% gas) with reserves of 420 Bcfe (58% PD, 82% gas). The transaction metrics, after PLS allocates $49 million to undeveloped acreage and $100 million to the hedge book, are $3,893 per Mcfed and $0.70 per Mcfe of proved reserves.

All indicators are that this is certainly not the last deal for Vanguard in the Woodford or even perhaps the Fayetteville. According to Vanguard President and CEO Scott Smith, "we believe it's a great time to purchase natural gas assets … we have established a new operating area which we believe has potential for future growth through other acquisitions as well as development as natural gas prices improve."

Another surprise deal this period is Forestar Group's offer to buy Credo Petroleum. Credo is one of the last standing public E&P companies formed back in the late 1970s and in recent years has successfully transformed itself from an almost exclusive natural gas producer to one that is now primarily oil. This transformation caught the eye of diversified and publicly traded Forestar Group which, in addition to oil and gas, is involved with real estate, water and timberlands. Forestar offered $14.50 per share in cash for Credo, which represents a 34% premium to the pre-announcement trading price. According to Forestar President and CEO Jim DeCosmo, "this strategic acquisition is consistent with our Triple in FOR initiatives to accelerate value realizations, optimize transparency and disclosure and raise net asset value through strategic and disciplined investments."

Credo brings Forestar a solid platform for continued growth including the ability to participate in as many as 400 wells in the Bakken/Three Forks oil play in North Dakota, where Credo owns about 6,000 net mineral acres comprising about 50 units in the core of the play. Credo also provides scale, operations, talent plus ability for Forestar to report additional reserve categories on their existing mineral acreage.

At press time, several deals were announced including a $1.025 billion Linn Energy buy of a stake in Jonah field from BP, a $250 MM JV investment by Osaka Gas with Cabot on Pearsall acreage, a $280 MM Mitsui buy in the North Sea from BP and a $725 MM Pertamina purchase of Venezuela assets from Harvest Natural Resources.

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