Merger Monday, Anadarko Surrenders

Jim Brown
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Multiple deals in the energy sector were announced before the open on Monday and that was instrumental in keeping the majority of energy stocks from losing too much ground on a very bad day in the markets.

The biggest deal saw Kinder Morgan (KMI) announcing a deal to acquire El Paso (EP) for $21.1 billion. This will create the largest pipeline company in the U.S. with more than 67,000 miles of pipeline. There are still a lot of questions on how they are going to get the deal past regulators but that is their problem not ours. The total value of the deal including assumed debt is $37.8 billion.

In order to finance the deal, which will be part cash, debt and equity will require Kinder Morgan to stretch out of its comfort zone as a conservative pipeline manager. Helping to fund this will be some asset sales. The initial assets for sale will be more than 500,000 acres of shale fields that could bring a price of more than $7 billion according to Bloomberg. These acres belong to El Paso and will be auctioned off to reduce the balance on the deal.

Several analysts believe the bidding could attract companies from all over the world including Reliance Industries from India, Statoil, BHP Billiton or even a Chinese company. Exxon has already said they are looking for more shale assets in the U.S. so you can bet they will be looking at the deal. Apache, Hess and Occidental could also be bidders according to an analyst at Edward Jones.

Kinder Morgan's debt will rise from $3.2 billion to $14.5 billion when the EP acquisition is completed. Selling off $7 billion in shale assets would be a significant bonus to bring that debt back down.

El Paso owns lease rights to 46,000 acres in the Haynesville Shale in Louisiana and 500,000 acres in the Eagle Ford Shale and Permian Basin in Texas. There are also rights to 605,000 acres of coal bed methane leases in Colorado and New Mexico.

El Paso earned $1.1 billion ebitda in 2010 from its exploration activities. Using the recent multiples that makes the assets worth more than $7 billion to as much as $9 billion. The bonus here is that most of the El Paso acreage is undeveloped. That leave plenty of upside and there is enough cash flow from existing operations to support future development.

Statoil Buys Brigham Exploration

If that deal was not enough to solidify the interest in shale exploration there is always Brigham Exploration (BEXP). Statoil ASA (STO) announced on Monday it was buying Brigham for $4.4 billion in cash. That equates to $36.50 for each BEXP share. That is a 20% premium over Friday's closing price. It is the seventh largest takeover in the energy industry this year.

Statoil bought Brigham to get a foothold in the Bakken and Three Forks plays. Statoil is on an aggressive acquisition program because their main assets in Norway have declined about 50% since 2000. Statoil has recently expanded exploration efforts in Brazil, Angola and the Gulf of Mexico. Over the last 12 months Statoil has announced more than $10 billion in deals.

The Bakken and Three Forks is a 200,000 square mile formation centered in North Dakota. Over the last ten years production has risen from less than 50,000 bpd to more than 400,000 bpd in 2010. Some analysts believe the formation might eventually produce up to two million barrels per day.

Statoil had already purchased some Marcellus shale assets for $3.37 billion from Chesapeake (CHK) and acquired some Eagle Ford acreage from SM Energy for $225 million in partnership with Talisman (TLM).

After the BEXP deal Statoil will have 375,000 net acres in the Bakken and Three Forks plus 40,000 acres in other locations. Statoil believes the Bakken acres have 300-500 million BOE.

They are paying a pretty high price for the Bakken at $55 per barrel. They are going to invest $750 million in the area next year in an effort to boost production to the point where further exploration is self supporting. Statoil expects total production of 2.5 mbpd by 2020 with 500,000 bpd from the USA.

Sinopec Buys Daylight Energy

This deal was announced late last week with Sinopec (SNP) buying Canadian oil and gas producer Daylight Energy for $2.1 billion. Daylight owned 320,000 acres in western Canada. The deal is large enough that Canada will get to review it and could nix the deal. However, Daylight was losing money so that could be a point in Sinopec's favor.

Superior Energy Buys Complete Production Services

Last Monday Superior (SPN) announced it was buying Complete Production (CPX) for $2.7 billion in cash and stock. That is a 61% premium to Friday's close. This deal will increase Superior's pressure pumping services and bring them closer to competing with companies like Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI). This also helps diversify Superior away from its offshore market and provide them with a lot of hardware and equipment already active in the shale drilling areas.

So far in 2011 there have been more than $149 billion in acquisitions in North America. That is roughly 64% of the $235 billion done year to date worldwide according to Thomson Reuters. The company said it expects more than $311 billion before the year is out.

Shares of other shale exploration companies including Range Resources (RRC) and Whiting Petroleum (WLL) have risen sharply over the last week. Range rose +20% and Whiting +9% on takeover speculation. Those are just two companies out of a dozen or more that may be targets. The initial land grab is over and these companies have proved out their leases by initial drilling programs and that means the risk to an acquirer is lower. Nobody wants to buy one of these small companies with an aggressive land program to find out later their land was not productive.

With every deal that gets done it narrows the field of the remaining candidates. The large companies looking to make acquisitions have to accelerate their pace or end up left out as the best dance partners end up with marriage proposals. Nobody wants to be that 40-year old bachelor that can't get a date.

Anadarko Caves In To BP

Anadarko Petroleum (APC) was a 25% silent partner in the Macondo well in the Gulf of Mexico. When the well blew up due to mismanagement BP sued Anadarko and Mitsui, a 10% owner, for cleanup expenses. Anadarko said the damages from the oil spill were not their responsibility and refused to pay. BP has booked a $42 billion liability and has been selling assets to raise cash to pay claims.

Anadarko claimed BP was grossly negligent in the accident because of the 29 separate items that were found to have contributed to the accident and more than 20 were BP's fault. Anadarko put up a solid defense but it appears they finally caved in as the court date for the accident liability draws near in February.

Anadarko said it had agreed to pay $4 billion to the BP claim fund and both companies will release all claims against each other. BP had been suing Anadarko for $6.1 billion. Anadarko also agreed to turn over its 25% share in the Macondo well to BP. Anadarko will fund the payment from cash on hand, $3.4 billion at the end of Q2 and the rest will be drawn from their $5 billion credit facility. Anadarko expects to receive $163 million in net insurance proceeds.

Anadarko shares rallied +$4 on the news as investors cheered the removal of the liability cloud and shorts expecting a big verdict were forced to cover.

Mitsui had already settled with BP for just over $1 billion for its 10% ownership liability. Weatherford (WFT) agreed to pay $75 million to settle claims over the potential fault of a collar designed to hold the concrete in place during a cementing operation on the well.

Still fighting BP is Halliburton (HAL) and Transocean Offshore (RIG). Halliburton designed the concrete mixture that was used in the well and has been the focal point for the failure that caused the disaster. Transocean was blamed for not recognizing the warning signs of a kickback in progress in time to take corrective action. Both Halliburton and Transocean claim their contracts specifically exempt them from any liability EVEN in the case of gross negligence. The contract language has been circulating on the Internet for the last year and it would seem they have a case but you never know how a court will rule.

If Transocean were to settle for a billion dollars I believe their stock would soar as well. There is a huge cloud hanging over them with the unknown liability. If they are going to settle they need to do it in the next 90 days before the liability trial starts in February.

Jim Brown

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