Economist’s Corner

Motivations for
Mergers and Acquisitions in E&P
Doug Rogers, Evercore

Corporate mergers and acquisitions to gain scale and efficiencies, enter
(M&A) in the US exploration and lockedup plays, add technical expertise,
production (E&P) space have occurred or add low-risk proved reserves. While
at a pace of about three to four public no deal falls into only one category,
company mergers per year for the past specific ones can be instructive in
decade. This pace does not appear seeing these motivations at play.
correlated to commodity price swings.
Despite the two recent episodes of Synergies and Scale
severe price declines, one in late 2008 M&A deals allow a reduction in G&A
and another in late 2014, it does not costs because a combined organization
appear that companies are choosing to leads to reduced administrative fees and
take advantage of “cheap” valuations more production being operated with
as a result of commodity price, and the fewer personnel. For example, when
resulting stock price, declines. Breitburn acquired Quantum Resources
In actuality, Fig. 1 shows M&A in July 2014, there was significant asset
activity tends to slow down when overlap and management estimated
commodity prices move dramatically USD 23 million in synergies in the first
(high or low) and resumes after year. When assessing G&A synergies, it
a period of sustained prices. So is common to start with the assumption
what motivates companies to make that cash G&A costs will be reduced
corporate acquisitions? by 50% as a result of the M&A activity.
In most industries, M&A is driven Much of that reduction is derived from
by financial rationales such as accretion eliminating the administrative cost
to cash flow per share or earnings per burden associated with being a publicly
share. In addition to long-term financial traded  company.
value, E&P companies have other Larger, more financially sound
motivations that drive the mergers. companies tend to receive better
Certainly there are corporate synergies treatment in the public markets,
and general and administrative (G&A) especially in the face of declining
cost reductions that are likely, as in any prices. The announcement of Whiting
other industry, but the rationale extends Petroleum’s acquisition of Kodiak
to unique situations within the E&P Oil & Gas listed synergies and scale
space: companies often use mergers as reasons, but also said that the
Doug Rogers is a managing director for the oil and gas
acquisition and divestiture (A&D) advisory business at
Evercore. He has more than 12 years of experience in
reservoir engineering and investment banking advisory
roles. Since joining Evercore, Rogers has worked on a
number of corporate mergers and acquisitions, asset A&D
deals, capital raises/joint ventures, and fairness opinions. His
technical career began at ExxonMobil where his work
focused on field exploitation and development, opportunity evaluation, reserves,
and strategy. Rogers holds a BS in chemical engineering from Brigham Young
University and an MBA from the McCombs School of Business at the University of
Texas at Austin.
combination of companies will improve
its financial strength.
Whiting press release, 13 July 2014
… The combined company’s leading oil-
weighted platform will drive meaningful
production and operational synergies
through complementary acreage
positions, the application of technological
expertise and greater access to capital
to accelerate drilling. In addition, the
transaction materially enhances the
combined company’s scale, providing
a stronger credit profile and greater
financial flexibility. …
A similar explanation was given
as part of the benefits to Energy XXI’s
acquisition of EPL Oil & Gas in March
2014. The company specifically listed
economies of scale as a rationale for
the transaction.
Energy XXI press release, 12 March 2014
… The combined company’s larger presence
on the central Gulf of Mexico shelf can drive
capital costs lower and operating efficiencies
higher. …
These synergies and economy
of scale can greatly improve the
health of a company by increasing
the profit derived from each barrel of
oil produced. The effect is magnified
when prices decline and profit
margins narrow.
Access to Locked Up Plays
Core acreage in high-quality, high-
return plays is limited because most
of the sought-after acreage, especially
in more mature plays, is already held.
Building a position of scale by leasing
is impossible in these situations,
leaving acquisitions as the only way
to obtain acreage.

Vol. 11 // No. 3 // 2015 17

 Economist’s Corner

160

140
Oil Price (USD/bbl); Gas Price (USD/MMBtu)×10

120

100

80

63
60

41 45 45
40 39
35
32
20 22 19
20
13

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Time (Years)

Transaction Value/Proved Reserves (USD/BOE) Oil Price (West Texas Intermediate/bbl)

US Corporate Merger and Acquisition Gas Price (Henry Hub USD/MMBtu) ×10
Source: PLS. USD/BOE calculated based on oil-to-gas spot price ratio at the time of announcement.

Fig. 1—Commodity price paid for proved reserves over the past decade (transaction value/total proved reserves).

In September 2014, Encana Noble press release, 11 May 2015 a company at the corporate level, the
announced the acquisition of Midland Noble Energy Announces Entry Into Eagle buyer also gains the employees of the
Basin pure-play company Athlon Ford And Permian Through Acquisition of acquired company and their expertise,
Energy for USD 7.1 billion. The Rosetta Resources. relationships, and contacts in the
purchase not only gave Encana a area. This greatly reduces or entirely
sizable entry into a new basin, but it Due to the high-quality, high rate-of- eliminates the learning curve of the
also helped the company in its stated return drilling potential in both plays, new owner.
desire to shift its production mix it is quite challenging to gain access to This access to personnel is a
toward oil. The headline of Encana’s them. For the most part, the core areas common benefit sought by foreign oil
news release is a good summary of of most plays are already leased and companies or global conglomerates
its motivations. have been consolidated by a handful of that do not have sufficient domestic
operators. In many cases, acquiring a operating capabilities. When BHP Billiton
Encana press release, 29 September 2014 company may be the only way to gain announced the purchase of Petrohawk in
Encana Announces Transformative entry into the core of a play. 2011 for USD 15.1 billion, it emphasized
Acquisition of Athlon Energy to the importance of the employees.
Establish a Premier Oil Position in Technical Expertise
the Permian. When first entering a play or basin, new BHP Billiton press release, 15 July 2011
operators have a steep learning curve … Importantly, BHP Billiton would retain
In the case of Noble’s purchase of in how wells are drilled, completed, and Petrohawk’s sizeable US-based workforce,
Rosetta Resources announced earlier operated. Employee relationships with which has been at the forefront of the
this year, Noble gained new access local service providers are important technological innovation that brought about
to two plays with a single transaction. for controlling development costs and the economic viability of US shales…
Similar to the Encana-Athlon deal, achieving optimal well delivery. Often
Noble’s purpose of transaction a new entrant will take years to fully get In an asset-only sale, the seller
was summarized in the press back up to the speed at which the seller is rarely willing to part with their
release headline. was when it sold the asset. By purchasing employees as finding and replacing

18
high-quality employees is often quite
difficult. By acquiring the company, the
buyer gains access to the employees as
well as the assets.
BHP Billiton’s purchase of
Petrohawk, Statoil’s acquisition of
Brigham Resources in October 2011,
and Freeport-McMoRan’s purchase of
Plains Exploration & Production and
McMoRan Exploration in December
2012 all provided the buyers with
a fully functioning organization
in place that had the expertise
necessary to continue with the
project execution.
Adding De-risked,
Proved Reserves
M&A activities are a relatively risk-free
way to add proved reserves. Oil and
gas companies either need to drill to
discover and prove reserves, or they
can purchase reserves already proven
by another company. Metrics such
as the “reserve replacement ratio”
discussed by many public companies
show the importance of continuously
adding more proved reserves than
are produced.
Fig. 1 shows the amount paid
for proved reserves by year over the
past decade (transaction value/total
proved reserves). When adjusting
for the oil-to-gas price equivalence
at the time of announcement, proved
reserves in corporate M&A deals
have traded, on average, in the
range of USD 30 to USD 40 per BOE.
It also appears to roughly track oil
price movements. From 2010 to
2012, proved reserves traded higher
because shale reserves were not being
fully booked as proven but still valued
in mergers.
A notable example would be
BHP Billiton’s purchase of Petrohawk,
which traded for USD 79/proved BOE
(USD 95.69/bbl and USD 4.42 MMBtu
or an oil-to-gas value ratio of 21.6:1).
As more shale reserves were
booked as proven over the next
couple of years, the price paid per
BOE steadily dropped.
The benefit of corporate M&A
for an E&P company is that it
can accomplish many goals in
one transaction. This includes
improving financial strength and
efficiency, entering a lockedup
play, adding proved reserves,
and adding key employees.
Companies pay a premium in
corporate deals vs. asset-only
transactions and these other benefits
truly do allow a company to unlock
additional value. TWA

2015 SPE ATCE Student and YP Events

Venue: George R. Brown Convention Center,
Houston. Events are subject to change. For up-to-date
information, visit www.spe.org/atce.
SATURDAY, 26 SEPTEMBER
SPE Petroleum Engineering Certification Exam, 0800–1600
www.spe.org/certification. Applications must be completed
2 weeks before the exam session.
SUNDAY, 27 SEPTEMBER
SPE Section and Student Chapter Leadership Workshop,
0800–1700
Current and future SPE Section and Student Chapter leaders are
invited. Sections and student chapters actively participating in
this workshop have consistently been recognized with awards
as the best in SPE.
Student Meet and Greet, 1200–1500
Make friends from around the world.
MONDAY, 28 SEPTEMBER
PetroBowl, 0800–1700, and PetroBowl Reception at 1700-1800
Tournament-style contest tests student chapter teams’
knowledge of the industry and SPE.
University Alumni Receptions, 1730–1900
TUESDAY, 29 SEPTEMBER
International Student Paper Contests
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Soft Skills Workshops, Ticketed Event, (includes lunch
at noon)
I. S
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Students will gain valuable insight into working in a truly global
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Student General Session and Awards Luncheon, Ticketed
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Seating is limited. Students must reserve a ticket during
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scholarship and fellowship recipients will be honored.
Young Professionals’ Reception, 1600–1800
Happy Hour on Exhibition Floor, 1630–1730

Vol. 11 // No. 3 // 2015 19