Energy Prospectus

“The amount of capital needed in the oil and gas industry always means there are opportunities for deals,” says Jim Dillavou, head of Deloitte & Touche’s energy transaction services practice.

Investors are betting the consolidation will continue.

Shares of Range Resources (RRC), a shale gas company that the research firm Morningstar considers a takeover target, have risen by nearly 20 percent since Thursday; Whiting Petroleum (WLL), with oil assets in Montana and the Dakotas, is up more than 9 percent in same period; and SandRidge Energy’s (SD) stock has gained nearly the same amount.

Small energy companies are particularly vulnerable to takeovers. While such players control highly attractive assets, many businesses are still struggling to turn a profit.

Last week, Sinopec of China agreed to buy Daylight Energy, a Canadian oil and natural gas producer, for about $2.1 billion in cash. Daylight, which lost $45.1 million last year, owns more than 320,000 acres in the resource-rich region of western Canada.

Despite the weakness, companies are betting on a boom in energy production. Natural gas production — mostly from unconventional sources like shale — is expected to increase by 25 percent over the next two decades, according to the U.S. Energy Information Administration.

Such prospects have spurred deals for infrastructure assets.

Through its purchase of El Paso, Kinder Morgan will own 67,000 miles of pipelines, moving more than 1.9 million barrels of fuels a day. If successful in its $5.9 billion bid for Southern Union, Energy Transfer Equities will oversee 44,000 miles of pipelines, with about 30.7 billion cubic feet of natural gas capacity.

With their dominant share of the market, Morgan Kinder and Equity Transfer are well placed to potentially charge high fees for use of their pipelines.

“The companies are positioning themselves to reap long-term benefits,” said Claudia Mahn, North American energy analyst at research group IHS Global Insight. “There are huge opportunities for growth when the economy starts to recover.”

MAYBE
After yesterday’s news that Statoil ASA was going to acquire Brigham, the long road for Brigham investors appears to be nearing an end. Brigham has 370,000 plus acres in the Williston basin that holds a resource base of 300 million to 500 million barrels of oil. At the acquisition price of $36.50, the 2012 PE multiple looks to be around 16. This seems expensive for a traditional and mature O&G producer, but for a company like Brigham can be viewed as fair value or perhaps even “cheap”. In terms of a “Bakken Pure Play”, Brigham is the only game in town that has significant acreage, a clear competitive advantage and a market cap under 5 billion dollars. Brigham has completed 88 consecutive, successful Bakken and Three Forks long lateral, high frac stage completions in North Dakota averaging 2,797 barrels of oil equivalent during the early 24 hours peak flow period. Brigham often is able to squeeze 20-40% more oil out of every well than their competition… In fact they have copyrighted the slogan “No Oil Left Behind” to stress their ability and acumen to maximize drilling efficiency. In my opinion, the perfect suitor would be a be O&G conglomerate that ALREADY has Bakken acreage, not a overseas O&G firm that is desperately looking for a growth engine. A company with significant Bakken acreage would be able to apply Brigham’s patented processed and techniques on their own properties and derive more overall value from their own portfolio. Something that StatOil will not be able to do with the Brigham Exploration. I wouldn’t be surprised to see a bid in the $39-42 range for Brigham in the next 2 weeks. That would still put the forward PE at a respectable 18 and be less than a $5 billion acquisition which is effectively in the noise for a larger player. It seems that Statoil ASA needs Brigham more than Brigham needs Statoil ASA, we’ll see if I’m right in the coming weeks.

Statoil will rapidly increase the number of drilling rigs. You can ignore the PE ratio they paid. Statoil believes oil prices are going higher or they would not have acquired BEXP. They get thousands of proven drilling locations, probablly over a billion bbls of recoverable oil in a safe country.

Dan, Seems like every law firm in the country is investigating the transaction. Either the price will go higher or it will be in court forever.

Bob

Scum Bag lawyers trying to make a buck. It happens on every deal like this.

I'm sure BEXP will get a fairness opinion and get the deal closed. It does not stop another company from making a higher offer.