Canadian Natural Resources Ltd.'s $2.8 billion purchase of Devon Energy Corp.'s conventional natural gas and oil assets in Canada in the first quarter was the largest exploration and production (E&P) acquisition in North America and the second largest worldwide, according to Evaluate Energy.
The merger and acquisition (M&A) report is published every quarter by Evaluate, which has tracked exploration and production deal activity, and licensing rounds, since 2008.
The Devon package provided Canadian Natural with an estimated 170 million boe of proved reserves (see Daily GPI, Feb. 19). Excluded in the purchase were Devon's unconventional projects in the gassy Horn River Shale, Lloydminster and thermal heavy oil assets.
Canada also scored the third biggest E&P deal in the period with Baytex Energy Corp.'s $2.3 billion acquisition of Aurora Oil & Gas Ltd. (see Shale Daily, Feb. 7). Baytex gained entry into the Eagle Ford Shale, where Australia-based Aurora primarily operates.
The United States posted the fourth-largest deal of the period with Houston-based Energy XXI's $2.3 billion takeover of EPL Oil & Gas Inc., a Gulf of Mexico (GOM) explorer (see Daily GPI, March 12).
Energy XXI's acquisitions in the recent Gulf of Mexico Central Area Lease Sale 231 by the Bureau of Land Management pushed its spending to $4 billion, accounting for 30% of total spend in the United States, Evaluate said.
"Energy XXI’s $2.3 billion acquisition of EPL represents an acquisition within their comfort zone in terms of the resources being acquired," said Evaluate analysts. "EPL Oil & Gas, just like Energy XXI, specializes in oil production around the Gulf of Mexico Shelf and coast. In terms of the size of acquisition however, Energy XXI will have to digest a company [with] an enterprise value 1.4 times greater than Energy XXI’s market capitalization and will lead to an increase of their already high level of debt that currently stands at 50% greater than their equity value."
The fifth-largest deal, also in the United States, was Occidental Petroleum Corp.'s $1.4 billion sale of its gas-heavy Hugoton field assets in Kansas to an unknown buyer (see Daily GPI,Feb. 14). The eighth largest transaction also was in the United States when Aubrey McClendon-run American Energy Partners LP acquired close to 74,000 acres of dry gas acreage in the Utica Shale from Hess Corp.; it acquired more Utica acreage from Hess and other sellers a few days later (see Shale Daily,Feb. 3;Jan. 30).
Overall, the first three months were a low period for deal activity among E&Ps worldwide. M&A in total reached $33.4 billion in 1Q2014, 28% lower than average quarterly spending in the past three years.
"The lower M&A value is also mirrored in the deal count of 205 deals during the quarter (excluding licensing rounds), which is 27% lower than the average deal count by quarter since 2010," Evaluate said. The shortfall was attributed to the absence of any major Chinese E&P activity and "eroding profitability" in the oil and gas industry.
"Since the start of 2010, state-influenced Chinese companies have been responsible for $95 billion of company-to-company oil and gas deals at an average spend of $5 billion per quarter. In 1Q2014, these companies accounted for only $147 million of upstream deals. It is likely that this relatively low amount of activity is more to do with a timing issue, rather than a shift in strategy from China" because Chinese companies are rumored to be interested in acquiring "large stakes" in the proposed liquefied natural gas projects on Canada's west coast and in Cyprus.
A "more significant factor" in the low dealmaking activity may be "the continued drop in profits for the upstream industry as a whole. At the time of publication, 200-plus companies had reported their 2013 annual results. Using the Evaluate Energy database, it can be seen that the 2013 normalized profits are 25% lower than in 2011 and 16% than 2012.
"The underlying reason behind the erosion of profits is the escalation of operating and development costs in the oil and gas industry, which haven't been reflected in the oil and gas price realizations. " That means "profits and free cash flow have been squeezed" and companies have been more tentative with capital expenditures.
The biggest deal in the period -- and the largest for the past 15 months -- was L1 Energy's acquisition of German utility RWE-DEA for $7.1 billion. "To find a larger deal than this we have to go back to December 2012, when Freeport-McMoRan Copper & Gold Inc. acquired Plains Exploration & Production for $16.3 billion," including debt, analysts said (see Daily GPI, Dec. 6, 2012).
"L1 Energy is a privately owned investment vehicle, owned primarily by Mikhail Fridman, the second richest man in Russia," analysts said. The board includes former BP plc chief, John Browne, and Stan Polovets, the CEO of the Alfa-Access-Renova Consortium, which owned a 50% stake in TNK-BP prior to OAO Rosneft's acquisition in 2012. "L1 Energy will be gaining oil and gas interests in 14 different countries with this acquisition and it is likely that more deals will follow; the company has pledged to invest $20 billion or more in oil and gas assets across the world."