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Upstream Deals Fizzle in Second Quarter

There wasn't a lot of wheeling and dealing in the upstream oil and gas industry during the second quarter, according to Evaluate Energy.

Total deal values in the upstream sector from April through June amounted to $23.6 billion, "lower than any quarter since 3Q2009," a period that had its own reasons for being sluggish, Evaluate said. In 3Q2009, "the credit crisis had claimed its first major victim with the collapse of Lehman Brothers, the U.S. Henry Hub gas benchmark fell below $2.00/Mcf and oil prices were still recovering after plummeting to $30.00/bbl at the end of 2008."

Why the lackluster performance in the latest quarter? While 2Q2013 may "lack the drama," with oil relatively stable at $90/boe oil and gas at about $4.00, "economic uncertainty still lingers...especially within the austerity-hit European market and many CEOs are erring to the side of caution when it comes to expanding beyond their company's reach."

There were a few big transactions in North America, but the biggest involved national oil companies (NOC), which are "less influenced by short and medium term economic fluctuations," Evaluate said.

"Following a vast deal value and count in Q42012, 2013 was touted by some as being a year with a large amount of potential for oil and gas deals due to stable commodity prices and an improving (albeit languidly) global economy," analysts said. "This has not proven to be the case so far in the first half of the year with the total deal value of $51.5 billion, which falls far short of the deal value in 2012 at the same point ($84.8 billion) and 2011 ($70.2 billion).

"There are still enough companies, however, requiring large capital injections" such as shale acreage holders, potential liquefied natural gas (LNG) assets and Brazil's pre-salt sector "and enough money in Chinese and Russian hands to potentially bring the deal values back into line with recent years before the year is done."

There were two big U.S. deals of note in the quarter, both involving unconventional onshore assets, according to Evaluate.

Breitburn Energy Partners LP agreed to pay about $860 million for stakes in Whiting Petroleum Corp.'s Postle and North East Hardesty oilfields in Oklahoma. Postle and Hardesty, both enhanced oil recovery projects in Texas County, OK, were producing about 7,400 boe/d net at the end of April, 87% weighted to oil and 11% to natural gas liquids (NGL). BreitBurn also is paying $30.2 million to some undisclosed sellers to gain a bigger stake in some of the acquired assets.

Denver's Kodiak Oil & Gas Corp. said it would pay Liberty Resources Corp. $660 million cash for 42,000 net acres and associated production in North Dakota's Williston Basin (see NGI, June 10a). The deal includes about 14,000 net acres in Williams County and 25,000 net in McKenzie County.

The biggest deal to close in the quarter also was in the United States by Freeport McMoRan Copper & Gold Inc., which paid $18.9 billion including debt to buy Plains Exploration & Production Inc. and affiliate McMoRan Exploration Co. (see NGI, June 10b; Dec. 10, 2012). "The closures came amidst pressure from the Plains shareholders for the purchase price to be increased" following a significant oil discovery in the Gulf of Mexico, Evaluate said. In the end, "Freeport relented to the demands and paid a special dividend upon closing worth an extra $1 billion to the Plains shareholders."

Hess Corp., under pressure from investors to pare costs, was involved in one of the biggest new deals, a $2.05 billion sale of its Russian assets to OAO Lukoil. "The deal was initially expected to raise little over $1 billion so the price negotiated can be seen as a coup for Hess," said Evaluate. "With Russia's steep production and corporate taxes, typical per proven bbl of reserve metrics seldom exceed $5.00/boe per boe...yet the Hess deal equates to approximately $25.00/proven boe for the oil-rich assets."

The largest new global transaction in 2Q2013 was by NOCs. India's state-owned Oil and Natural Gas Corp. Ltd. and Oil India paid Videocon Industries $2.5 billion for a 10% stake in the 100 Tcf-plus Rovuma basin offshore Mozambique. The 50 cent/Mcf of recoverable gas reserves "would usually represent good value but commercialization of the asset is at least five years away and will require large upfront payments to develop the field" and to construct a necessary liquefied natural gas exporting terminal, Evaluate said.

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