Creative financing helps small independent in GOM

Callon, Murphy, Oceaneering form partnership at deepwater Medusa project

Petroleum News

Small independent Callon Petroleum has worked out a creative but complicated deal with Gulf of Mexico partner Murphy Oil and newcomer Oceaneering International that apparently would help cash-strapped Callon meet its financial obligations for the deepwater Medusa project.

The trio has agreed to form a so-called limited liability company, a separate business entity that would hold a 75 percent interest in the $225 million Medusa production spar, Callon and Oceaneering said Sept. 3. Agip, which owns 25 percent of the spar and underlying reserves, did not to participate in the joint venture.

Last month Callon, based in Natchez, Miss., told industry analysts the company was running low on cash and credit and that making $31 million in payments due at year-end on Medusa and other deepwater projects could be touch and go.

Under terms of the limited liability company, Callon would contribute its 15 percent interest to the new company and retain 10 percent ownership. In return, the independent would receive $25 million in cash plus additional proceeds through financing. Sixty percent owner Murphy would contribute about 20 percent of its stake to the limited liability company and get about $100 million and retain operatorship.

Oceaneering, known primarily as a service company providing deepwater equipment, would invest $45 million to acquire a 50 percent ownership position in the limited liability company. Because the company involves the spar only, it would have no direct stake in reserves or field production. That would be held 60 percent by Murphy, 25 percent by Agip and 15 percent by Callon. However, the limited liability company would earn a tariff based on production volumes handled by the spar.

�This investment offers the opportunity for a good rate of return and source of stable long-term earnings for Oceaneering,� said John Huff, Oceaneering's chairman and chief executive officer.

Oceaneering currently has three mobile offshore production systems operating in Angola, Western Australia and Indonesia.

Spar in final stages of outfitting

The Medusa spar is currently moored in around 2,200 feet of water at Mississippi Canyon Block 582 in the Central Gulf, and is in the final stages of being outfitted for production scheduled to begin in mid-October. Production initially will come from six wells with peak rates of 40,000 barrels per day of oil and 35 million cubic feet per day of gas. Medusa, discovered in 1999, is said to hold equivalent reserves of 80 million barrels and an additional 45 million barrels in potential reserves.

It has been a financial juggling act for Callon, a small exploration and production company that posted a 2003 second-quarter loss of $647,000 on just $18.4 million in revenues, despite higher oil and gas prices. Daily production compared to last year's second quarter fell 12 percent to 37.8 million cubic feet of gas equivalent and was off 8 percent from this year's first quarter.

Callon clearly has a lot on its plate in the Gulf of Mexico. In addition to its overall $66 million obligation to Medusa development, the company's 11.25 percent share of development costs at the Shell operated Habanero field is pegged at $27 million. Callon also is shouldered with expenses related to its 15 percent share of North Medusa and Murphy's Stonemaker prospect near Medusa.

On a positive note, combined production from Medusa and Habanero is expected to more than double Callon's current production by next year's second quarter to about 82 million cubic feet per day of gas equivalent.