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Anadarko Strikes Eagle Ford JV with Korea National

Anadarko Petroleum Corp. and a unit of Korea National Oil Corp. (KNOC) have struck a joint venture (JV) agreement that gives KNOC one-third of Anadarko's interest in its southwest Texas Maverick Basin assets in the Eagle Ford Shale for about $1.55 billion.

Under the terms of the agreement, which is effective Jan. 1, 2011, KNOC's investment is to be in the form of a drilling carry, funding about 100% of Anadarko's 2011 post-closing capital costs in the basin, and up to 90% thereafter until the carry is exhausted, which is expected to occur by year-end 2013, Anadarko said.

KNOC will also reimburse Anadarko for net cash outflows, relative to its acquired interest, subsequent to the effective date, which are expected to be about $50 million. In exchange, KNOC will receive about 80,000 net acres in the liquids-rich Eagle Ford and about 16,000 additional prospective net acres for the deeper dry-gas Pearsall Shale, as well as Pearsall opportunities underlying the Eagle Ford acreage.

"This transaction demonstrates the substantial embedded value of our Eagle Ford acreage position assembled primarily in the higher-margin condensate window of the play, while further enhancing our capital efficiency in a tax-effective manner," said Anadarko CEO Al Walker.

Anadarko shares closed up more than 3.5% Monday at $79.98 after getting as high as $80. The stock's 52-week high is $82.92.

Anadarko sales volumes from the Eagle Ford have been 46% oil, 27% natural gas liquids and 27% dry gas. Spokesman John Christiansen said it is hard to say if a further shift toward oil is down the road. "I think we still have a lot of activity and drilling to do," he said.

"I think if you look geographically where we're located, the acreage position that we've amassed we believe is right in the heart of that gas condensate window with a little bit spilling over into what's considered the oil window of the Eagle Ford Shale. Geographically we have a great position...in regards to the higher-margin liquids yields."

The deeper dry gas in the Pearsall is "something that's down the road," Christiansen said. "We don't have any active rigs right now pursuing the Pearsall opportunities."

An Eagle Ford deal was said by Anadarko to be on the table last month (see Shale Daily, Feb. 28) following speculation last summer by at least one analyst that the company's acreage in the play would be attractive to partners (see Daily GPI, July 8, 2010).

Anadarko holds about 400,000 gross acres (300,000 net) and a strategic position in the Maverick Basin. Last month during a presentation to investors the company said it had increased the average estimated ultimate recoveries of its existing wells in the Eagle Ford to more than 450,000 boe per well and said it plans to double its drilling activity this year to more than 200 wells in the play. The company's wells cost $5-5.5 million each and usually have initial production rates of 1,000 boe/d.

In the Eagle Ford Anadarko said it has "everything in place," including dedicated service providers, gas gathering and oil facilities, water management, processing, fractionation and takeaway capacity.

KNOC may also elect within 30 days of the deal's closing to participate as a partner with an approximate 25% working interest in the play's associated gathering systems and facilities, by paying its share.

Closing is expected to occur during the second quarter and is subject to regulatory approvals and contractual conditions.

"We have expanded our midstream infrastructure and established various service agreements concurrent with our drilling pace in the Eagle Ford Shale, leading Anadarko to become the largest producer in the play during the fourth quarter of 2010," Walker said. "As a result, almost all of our completed wells are online, with approximately 75% of our sales volumes comprised of liquids."

In February the company said it would increase its operated rig count from nine to 10 early in the second quarter. Even if the JV with KNOC had not been struck, Anadarko would still be stepping up in the Eagle Ford, Christiansen said.

"We would have done this regardless of the [drilling] carry," he said, "And we've identified anywhere from 2,000 to the potential of 4,000, depending on spacing, [drilling] locations in the field. We think it's got a long life ahead of it...We're accelerating that activity quite a bit. A lot of it depends on what other operators do as well, but certainly we're moving forward pretty quickly."

Last year Anadarko entered a JV agreement for its Marcellus Shale acreage with Japan's Mitsui & Co. Ltd., which agreed to pay $1.4 billion to acquire a 32.5% stake in the company's 300,000-plus acre Marcellus leasehold (see Daily GPI, Feb. 17, 2010). The Eagle Ford JV is a continuation of the company's portfolio approach, Christiansen said.

"When you have the kind of assets that we do where you have a number of different liquids-rich opportunities throughout your portfolio, you're going to look at ways that you can maximize your capital spend," he said. "We like the structure of that [Marcellus JV], so we transferred that idea to the Eagle Ford."

KNOC has been an active player in international upstream deals, noted consultant Wood Mackenzie in a recent analysis (see Shale Daily, Jan. 27).

Last December a KNOC unit agreed to buy producing and undeveloped assets from Canadian subsidiaries of Hunt Oil Co. of Dallas for C$525 million (US$521 million). Included were 52.9 MMboe of proved plus probable reserves, as well as about 377,000 net acres of undeveloped land; complementary land positions in Willesden Green, the Peace River Arch and southern Alberta; and access to resource plays in the Willesden Green area of Alberta and the Horn River Basin of British Columbia (see Daily GPI, Dec. 16, 2010).

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