Foreign buyers, unconventional assets dominate deals

The largest deal of the 30-day period from mid-December to mid-January involves a Chinese firm and emerging North American unconventional plays. Devon Energy Corp. signed an agreement with Sinopec International Petroleum Exploration & Production Corp. (SIPC) whereby SIPC will invest $2.2 billion in exchange for one-third of Devon's interest in five emerging plays.

In addition to the $2.2 billion, SIPC will pay Devon $300 million as reimbursement for costs incurred prior to closing. The acreage encompasses 300,000 net acres in the Niobrara, 210,000 in the Mississippian, 235,000 in the Utica, 340,000 in Michigan, and 265,000 in the Tuscaloosa Marine Shale (TMS).

"The total consideration of $2.5 billion implies a robust $5,500 per acre. This is impressive given 1) the lack of peer interest in Michigan Utica and A1 carbonate, 2) industry doubts about the TMS, 3) variability in the Niobrara, 4) 2/3's of the Niobrara acreage is in the less desirable PRB basin, 5) some of DVN's Utica acreage is on the western fringes of the play, as indicated by state drilling permits, and 6) the general lack of well control. Positively, the upfront payment of $900 million to be made upon closing, slated for 1Q12, would more than cover DVN's acreage acquisition costs for this portfolio," said Jefferies & Co. Inc. analysts in a January 3 note to investors.

In addition to the upfront cash payment, SIPC will hand over $1.6 billion in the form of a drilling carry. The carry will fund 70% of Devon's capital requirements, which results in SIPC paying 80% of the overall development costs during the carry period. Based on the current work plan, the company expects the entire $1.6 billion carry to be realized by year-end 2014. Through 2012, the companies expect to drill approximately 125 gross wells in the five plays.

Another large deal involving a foreign company and a private US-based company made news during the 30-day timeframe. In early January, Marubeni Corp. became Japan's largest owner of American shale oil acreage when it announced its plan to acquire nearly 52,000 net acres in the Eagle Ford from Hunt Oil.

The Japanese trading company will acquire a 35% working interest in the Dallas-based company's oil and gas leases in South Texas.

While the acquisition cost was not reported, Evaluate Energy estimates total development costs (including acquisition costs on Marubeni's share basis) of nearly US$1.3 billion.

Global Hunter Securities' estimates back up the possible transaction costs, noting January 6 that Marubeni paid roughly $1.3 billion or approximately $25,000 per acre on an acreage-only basis from the private operator. This transaction, continued the analysts, "shows that demand to gain a stake in Eagle Ford isn't cooling."

Another unconventional play, this time the Canadian oil sands, also grabbed a large portion of the M&A space in the time period. On January 3, Canadian crude producer Athabasca Oil Sands Corp. outlined its plan to sell its remaining 40% interest in the MacKay River oil sands project to Cretaceous Oilsands Holdings Ltd., a wholly owned subsidiary of PetroChina International Investment Ltd.

The $680 million (Cdn.) deal, according to OGFJ's sister publication Oil & Gas Journal, marks the first time a Chinese firm will wholly own a Canadian oil sands project.

In late 2009, PetroChina bought a 60% stake in the project for $1.9 billion (Can.). The February 10, 2010 Put/Call Option Agreement between Cretaceous and Athabasca granted the option to trigger the recent 40% sale.

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