Reliance - Apollo Evaluate El Paso Assets

Since Kinder Morgan's $21+ billion acquisition of El Paso was announced, it was believed Kinder would sell the accompanying exploration and production assets. We explored the possibility in more detail in the blog post "El Paso's Eagle Ford Assets on the Market" The real question is whether the e&p assets will be sold all together or if they will be sold in parts. I'm sure Mr. Kinder knows how much other deals have gone for and he'll want to get a similar premium for El Paso's Eagle Ford assets. If he doesn't get the premium or dang close baked into a deal for the entire business unit, he'll sell the assets off one by one. Expect a decision on selling the whole or parts real soon. Publicized estimates of El Paso's e&p value are around $8 billion.

Both Reliance Industries and Apollo Global Management are in talks to buy the unit. Reliance would be buying an operated stake in the U.S. where to date it only acts as a non-operated partner in the Marcellus Shale. Apollo would be adding a significant e&p business that it would likely grow and market to other companies or eventually IPO. Private equity firms like Apollo usually hold assets for 3-10 years. 

Reliance Industries Ltd. and Apollo Global Management LLC are among companies in talks to buy El Paso Corp.'s oil and gas exploration and production unit, said people with knowledge of the matter.

 

 

El Paso's Eagle Ford Assets on the Market

El Paso Corporation and Kinder Morgan announced a $38 billion transaction where the later will acquire all of El Paso's assets. The deal will create a pipeline and midstream company that is the 4th largest energy company in North America (Enterprise Value of >$90 Billion). El Paso had plans to spin off its exploration and production business at the end of the year, but those plans are delayed until Kinder Morgan has full control of the assets. The company still plans to divest the E&P assets, but is more likely to sell individual assets instead of spinning off a new entity. That means there are Eagle Ford wells and acreage on the market.

An international company like BHP or the Eagle Ford partnership between Talisman and Statoil are the most logical bidders. The proximity fits and both entities have the cash.

El Paso's Eagle Ford assets are located in La Salle County, TX where both Petrohawk (now BHP) and Talisman-Statoil operate. The El Paso assets would compliment other transactions by the same companies:

It's not Eagle Ford related, but Statoil announced the acquisition of Bakken focused Brigham Exploration on October 17, 2011. By becoming an onshore operator, I suspect the company's appetite for acreage will grow.

None of the three companies companies have been shy about acquiring U.S. shale assets. The El Paso acreage falls right in the middle of the Talisman-Statoil partnership and just west of BHP's Hawkville asset. It's a logical fit, but you never now how a company's appetite changes from day to day. With all of the bullish sentiment around the Eagle Ford, I doubt it will take long for someone to swoop in on this deal.

“On the PE side, the odds are that these assets would be sold separately,” said Adam Connors, a director in corporate finance group of boutique investment bank C.K. Cooper & Co. “There could also be another E&P company buying whole thing, but in terms of the odds of a PE firm picking up all of it and operating it effectively – they’re slim.”

The assets include El Paso’s “active drilling program” in the Eagle Ford Shale in South Texas, an emerging Wolfcamp position, as well as portions of its Gulf of Mexico and South Texas assets. It also includes Haynesville, Wilcox – a conventional gas play – and Altamont, up in the Rockies. Additional operations are in offshore Brazil and Egypt’s Western Desert.

Read more at wsj.com

R.T.

Not Enough Pipelines, Railcars, or Trucks for U.S. Crude

West Texas Intermediate (WTI) crude is trading at a more than $25 discount to Brent Crude. Brent prices are used as the benchmark for two-thirds of the international crude trade. WTI is used as the U.S. benchmark. More than $25 per barrel is an amazing spread when you consider WTI is priced in Cushing Oklahoma and the U.S. accounts for almost 25% of worldwide oil demand. How can oil be cheapest where demand is the highest? When you have a moment, look at Bakken and Eagle Ford drilling levels.

Shale Plays Adding Production Outside of the Gulf Coast

Shale plays like the Bakken and growing plays in West Texas along with an influx of Canadian oilsands production in the midwest have pushed a surplus of oil all the way to Oklahoma. In a perfect market, we could move oil quickly and easily to take advantage of the arbitrage or "free money". Oil needs to penetrate the Gulf Coast refining market to recognize higher prices. Sounds simple.

Pipelines, Railroads, and Trucks are Stressed

We need more pipelines delivering crude in the Gulf Coast. We don't have capacity, so oil marketers resort to railroad agreements. When rail terminals and railcars run at capacity, trucking becomes the last option. For you guys with a truck and trailer, there's a margin waiting to be made between Cushing, OK, and the Gulf Coast.

The idea of trucking crude sounds great, but no one is doing it because they are already working in the shale plays. Trucks are making as much as $5 a barrel to move crude from tanks to pipelines or storage facilities and those are short hauls. If you can make $5 a barrel three to four times in a day ($3,000-4,000 per day) , there is no incentive to make long hauls that would only pay $7.50-10.00 per barrel ($1,500-2,000 per day). The math is simple, so don't expect truckers to fill the gap as long as there is high demand for short haul trips.

The shortage of pipelines, rail facilities, and now trucks has led to the historic spread between foreign brent crude and WTI (the futures spread was $27 on October 14). As the Bakken and other oil plays continue to grow, the problem will only be answered by major pipeline expansions. Some of those are already in the works, but more are likely on the way.

R.T. Signature]

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Eagle Ford Companies Rank as Top Natural Gas Producers

Eagle Ford companies dot a list of the Natural Gas Supply Association's (NGSA) top 40 natural gas producers in the U.S. 18 of the top 40 gas producers in the U.S. also have an interest in the Eagle Ford Shale.

In total, the 18 Eagle Ford operators on the list produce more than 19 Bcf per day net to the companies. Assuming a 20% uplift for royalty and fuel loss, gross volumes easily top 24 Bcf per day. That's 32% of the 69 Bcf per day produced in the onshore Lower 48 states as of June (Source: EIA).

Companies with Eagle Ford Shale interest are in bold.

U.S. Natural Gas Production by Company for First Half of 2011

Company / Production in mmcfd

  • ExxonMobil (with XTO) / 3,873
  • Chesapeake Energy / 2,639
  • Anadarko / 2,369
  • Devon Energy / 1,997
  • BP / 1,869
  • Encana / 1,833
  • ConocoPhillips / 1,621
  • Southwestern Energy Co. / 1,312
  • Chevron / 1,284
  • Williams Energy ** / 1,179
  • EOG Resources / 1,124
  • Royal Dutch Shell plc / 953
  • Apache / 869
  • Petrohawk Energy Corporation / 792
  • Occidental / 748
  • QEP Resources / 641
  • El Paso Energy / 629
  • Ultra Petroleum / 614
  • Newfield Exploration / 510
  • EQT Resources / 464
  • Exco Resources / 442
  • Cabot Oil & Gas / 439
  • Noble Energy, Inc. / 380
  • Range Resources / 346
  • Marathon / 341
  • Pioneer Natural / 331
  • Cimarex Energy / 326
  • Plains Exploration & Production Co. / 285
  • Quicksilver Resources / 253
  • SM Energy Company / 252
  • Forest Oil / 248
  • Energen Resources Corp. / 194
  • SandRidge Energy / 191
  • Linn Energy / 164
  • W&T Offshore, Inc. / 138
  • McMoRan Exploration / 129
  • MDU Resources / 127
  • Unit Corporation / 117
  •  Stone Energy / 112
  • Hess Corporation / 103

**Provides combined quarterly natural gas and oil production data only.

Please comment below if we've missed anyone.

R.T.