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May 2005

Vol. 10, No. 19 Week of May 08, 2005

EXPLORERS USA 2005: Mergers and acquisitions activity surges

E&P independents ride M&A market on strong commodity prices, desire to build production on shrinking U.S oil and gas reserves

Ray Tyson

Petroleum News Houston Correspondent

Merger and acquisition activity in the United States, supported by exceptionally strong commodity prices, increased dramatically over the past year and a half, particularly among exploration and production independents looking to both expand and secure their acreage positions in an ever-tightening U.S. oil and gas reserves market.

There were at least a dozen noteworthy deals involving publicly traded independents Chesapeake Energy, XTO Energy, Forest Oil, Evergreen Resources, Pioneer Natural Resources, Newfield Exploration, Kerr-McGee, Westport Resources, Apache, Noble Energy and Anadarko Petroleum.

Chesapeake: $2 billion plus

Chesapeake alone piled up more than $2 billion worth of property acquisitions during 2004, ending the year with the $325 million cash purchase of BRG Petroleum, founded and chaired by James Burkhart, a member of Texas A&M’s famed “Junction Boys” football team coached by legendary college coach Paul “Bear” Bryant in the 1950s.

From the BRG acquisition, which expanded Chesapeake’s already strong U.S. Mid-continent position, Chesapeake expected to gain an estimated 223 billion cubic feet of proved natural gas equivalent reserves and 277 bcf of probable and possible reserves, plus about 30 million cubic feet of daily gas equivalent production from 477 existing wells.

The BRG transaction came on the heels of several other Chesapeake deals announced or closed in 2004.

They included: $277 million for Hallwood Energy properties in the prolific Barnett Shale field of East Texas; $590 million for South Texas and Mid-continent properties from three private companies; $425 million for Greystone Petroleum that included Greystone’s position in the giant Sligo field in Louisiana; and $420 million for Mid-continent, Permian Basin, South Texas and onshore Gulf Coast properties from Concho Resources.

Chesapeake’s success through acquisitions and an aggressive exploration and exploitation program has transformed the Oklahoma-based company into the sixth largest independent producer of natural gas in the United States.

XTO Energy: $3 billion plus

Forth Worth, Texas-based XTO Energy, among the more deal-minded exploration and production independents, had acquired more than $3 billion in oil and gas properties between 2002 and year-end 2004.

XTO entered 2005 with the announced $665 million acquisition of privately held Antero Resources, a deal which transformed XTO into the second largest producer in the hot Barnett Shale play of East Texas. The acquisition caused XTO to increase its estimated production growth rate for 2005 to 21-23 percent over 2004 from a previously forecasted 18-20 percent. XTO later exercised an option to buy Antero’s pipeline system in the Barnett Shale field for $175 million.

In addition to the Antero transactions, XTO’s more notable acquisitions through 2004 included the $1.1 billion purchase of ChevronTexaco oil and gas properties spread across seven states, including Texas and New Mexico, and the $340 million purchase of ExxonMobil onshore assets.

Forest: $1 billion plus

In March, Denver-based Forest Oil announced it was buying an undisclosed private company and its interest in the prolific Buffalo Wallow field in northern Texas for $230 million, bringing Forest’s acquisition total to more than $1 billion since the company reorganized in 2003. Buffalo Wallow, with estimated proved reserves of 120 bcf of gas equivalent, would become Forest’s largest field in terms of value and reserves.

Forest also unveiled an aggressive development plan for Buffalo Wallow designed to push daily production of 25 million to 30 million cubic feet of gas equivalent up to 40 million to 45 million cubic feet by year-end 2006. About 71 percent of the acquired reserves were natural gas. The company planned to drill 60 wells in 2005 and 110 wells in 2006, targeting the Granite Wash, Atoka and Morrow formations. For 2005 alone, the company said it would spend about $60 million on the field.

Kerr-McGee: $3.4 billion merger deal

On the merger front, Oklahoma’s Kerr-McGee scooped up Westport Resources in a $3.4 billion stock deal that provided Kerr-McGee with a 30 percent increase in proved reserves and a 34 percent boost in daily production, while greatly strengthening the big independent’s acreage position in the gas-prone Rocky Mountains. About 50 percent of the resources are in and around the Natural Buttes field, in the Uinta basin in northeast Utah. Combined, Kerr-McGee is producing about 1.2 billion cubic feet of natural gas and 160,000 barrels of oil per day.

Specifically, Westport provided Kerr-McGee with proven reserves of about 1.8 tcf of natural gas equivalent and another 1.8 tcf of probable and possible resources and more than 2,500 low-risk drilling locations. About 50 percent of the acquired resources are located in and around the Natural Buttes field, in the Uinta basin in northeast Utah.

Newfield: plus $780 million in acquisitions

In September 2004, Houston-based Newfield Exploration entered the Rockies with an announced $575 million acquisition of privately held Inland Resources. The Inland transaction came just weeks after Newfield gobbled up Denbury Resources’ offshore Gulf of Mexico assets for $186 million.

The heart and soul of Newfield’s Inland acquisition was the vast 110,000-acre Monument Butte field of Northeast Utah. A huge, relatively untapped resource situated in the middle of the prolific Uinta basin, Monument Butte is surrounded by large producing fields and is said to hold estimated overall reserves exceeding 2 billion barrels of oil equivalent.

Newfield specifically received proved reserves amounting to about 326 bcf of gas and probable reserves of about 439 bcf of equivalent. The reserves were 85 percent oil and 70 percent proved undeveloped. In fact, Monument Butte had never been touched by a major oil company or a large, well-financed independent. Before Newfield entered the picture, just 30 million barrels, or 1.5 percent of in-place oil reserves, had been recovered since the field was discovered in 1964.

Pioneer: $2.1 billion for Evergreen

In another largely stock deal, Dallas-based Pioneer Natural Resources acquired Denver’s Evergreen Resources last year in a deal valued at about $2.1 billion. Evergreen, a premier coalbed methane producer, provided Pioneer with a new core area in the Rockies.

Evergreen’s reserves increased Pioneer’s proved reserves by roughly one-third, essentially all North American natural gas. Evergreen’s year-end proved reserves of about 1.5 tcf of natural gas equivalents are concentrated in two Rockies basins, Raton (94 percent) and Piceance-Uintah (4 percent), and in southern Canada (2 percent).

Pioneer said Evergreen’s fields, largely in the Rockies, had “extensive opportunities” to extend proved reserves with an additional 890 bcf of identified probable reserves, according to Pioneer. Moreover, the transaction added more than 2,000 low-risk onshore U.S. drilling locations and at least eight years of low-risk production growth. Pioneer predicted it would double production from Evergreen’s assets by 2008.

Noble and Patina merger: $3.4 billion

In another mega-merger among independents, Noble Energy and Patina Oil & Gas tied the knot in late 2004 on a $3.4 billion agreement touted by the management of both companies as a marriage made in heaven. The acquisition boosted Noble’s production and reserves by more than 50 percent and gave the company a more weighted U.S. portfolio, particularly in the Rockies and Mid-continent.

Upon completion of the acquisition, Noble’s daily production was expected to jump 53 percent to 161,700 barrels of oil equivalent, with roughly 60 percent of the combined company’s daily production being natural gas. About 54 percent of Patina’s 253 million barrels of oil equivalent reserves at year-end 2003 were located in Colorado’s Wattenberg field in the Denver-Julesburg basin, with the rest in various fields in Oklahoma, the Texas Panhandle and New Mexico.

Apache: $1.3 billion in properties

In yet another deal, exploration and production independent Apache and investment bank Morgan Stanley last year acquired $1.3 billion in oil and gas properties on the Gulf of Mexico’s continental shelf from Anadarko Petroleum, another large independent producer. The sale marked Anadarko’s exit from the shelf, where the company pioneered tricky sub-salt exploration resulting in such noted discoveries as Mahogany, Hickory and Tanzanite.

Apache anted up $537 million of the $1.3 billion sale price to acquire a net 61 million barrels of the proved reserves and a hefty share of the daily production, plus the fields and platforms. Morgan Stanley paid Anadarko $775 million to acquire an overriding interest in 24 million barrels of proved oil equivalent reserves, using an investment tool known as Volumetric Production Payment, or VPP.

While it appeared Morgan Stanley got the short end of the stick, the investment banker is getting its production up front over the four-year term of the VPP. On the other hand, Morgan Stanley’s production share would revert to Apache when the VPP expires. Apache also retained sole rights to an additional 23 million barrels of estimated probable reserves.






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