Bloomberg News

Bakken Turns Oasis Into Target as Fracking Costs Slide: Real M&A

October 19, 2011

Oct. 19 (Bloomberg) -- Buyers looking to extract the best deals from Bakken shale oil may turn to Oasis Petroleum Inc. and Whiting Petroleum Corp. as the cost to find and produce a barrel of crude soars.

Among the biggest U.S. explorers in the 200,000 square-mile (518,000 square-kilometer) geological formation centered in North Dakota, Oasis and Whiting owned the most Bakken shale acreage versus their takeover value, according to data compiled by Bloomberg. On that basis, both control more land than Brigham Exploration Co., which sold itself to Statoil ASA this week for more than $12,000 per Bakken acre in the most expensive major acquisition in the region, said Pritchard Capital Partners LLC.

Energy companies around the world are pursuing unconventional oil assets such as Bakken shale to boost output as the average cost for finding and developing the fuel for the largest U.S. producers surged more than sixfold in the past decade, data compiled by Bloomberg show. Oasis and Whiting, along with Continental Resources Inc., may now attract interest from Exxon Mobil Corp., Royal Dutch Shell Plc and India’s Reliance Industries Ltd. as the cost to extract Bakken shale oil falls, SunTrust Robinson Humphrey and RBC Capital Markets said.

“Brigham just underpins what an attractive basin this is,” Stephen Berman, a New York-based analyst for Pritchard Capital, said in a telephone interview. “There are other companies that could be gobbled up in the consolidation. If they want to get in the basin in a big way, they’ve got to buy a Brigham or an Oasis.”

Horizontal Drilling

The Bakken formation, the largest contiguous oil deposit in the continental U.S., lies within the Williston Basin, an ancient sedimentary deposit that stretches from South Dakota into Canada’s province of Saskatchewan.

The formation may contain as much as 4.3 billion barrels of technically recovered oil under western North Dakota and eastern Montana, the U.S. Geological Survey estimated in April 2008. That’s enough to meet all U.S. crude oil needs for more than 220 days, based on an estimate by the Central Intelligence Agency.

So-called tight oil plays such as the Bakken have only been accessed in the past decade by drilling horizontally through oil-bearing rock and then fracturing the formation by injecting water mixed with sand and chemicals to keep the cracks open and petroleum flowing, a process known as “fracking.”

Most oil production so far has been in western North Dakota, where companies have tapped the so-called middle Bakken, a deposit trapped between two layers of shale, and Three Forks, rock underneath the lower shale layer.

Prolific Potential

“Given the size and potential of what this field could be, that’s attractive,” Christian O’Neill, an oil analyst for Bloomberg Industries in Skillman, New Jersey, said in a telephone interview. “You’re just entering in a development stage. It has the potential to be a prolific field over time.”

Statoil, Norway’s biggest oil company, gained about 375,000 net acres in the Williston Basin, where the Bakken and Three Forks are located, after saying this week it will purchase Austin, Texas-based Brigham for about $4.5 billion including net debt, according to data compiled by Bloomberg.

Based on the number of acres acquired, Statoil’s deal for Brigham would be the costliest major Bakken deal on record and at least 50 percent more than what Occidental Petroleum Corp. and Hess Corp. paid for Bakken acreage in the past year, according to RBC Capital.

Unconventional Drilling

Oil companies are expanding into unconventional drilling areas as the cost to locate, extract and produce the fuel skyrockets. Over the past 10 years, the finding and development costs at Exxon, the biggest U.S. producer, has jumped more than 10-fold to $14.21 a barrel, data compiled by Bloomberg show.

Among companies drilling for Bakken shale oil, Oasis and Whiting now offer the greatest value per acre, according to data compiled by Bloomberg. Houston-based Oasis controls 303,000 net acres in the Bakken and has an enterprise value, or the sum of its equity and net debt, of about $2.87 billion.

That equals 106 acres for each $1 million in enterprise value, the data show. Whiting of Denver had about 96 acres per $1 million. Both had almost three times more acreage implied by the median ratio for oil companies operating in the region.

Using Statoil’s deal offer of $12,082 per acre for Brigham, shares of Oasis and Whiting could now be worth at least 20 percent more in an acquisition, the data show.

‘Land Grab’

Oasis is a likely takeover candidate because it has properties close to Brigham’s fields and is probably open to selling itself, Pritchard Capital’s Berman said.

Whiting, which has much of its 579,000 net acres in the southern part of the basin, is the most leveraged to the Bakken of any oil producer with almost five acres per thousand shares, data compiled by Bloomberg show. Exxon’s 450,000 net acres amounts to less than 0.1 acre per thousand shares.

“You’ve done most of the land grab at this time, and so now to get a position in the Bakken for the most part you’re going to have to buy companies because it’s hard to buy large attractive acreage anymore,” Scott Hanold, a Minneapolis-based analyst for RBC Capital, said in a telephone interview. If the larger oil companies “want to get some of the better positions they’ve got to act sooner than later,” he said.

Richard Robuck, director of investor relations at Oasis, and Whiting’s John B. Kelso didn’t return telephone calls seeking comment.

Oasis shares rose as much as 4.3 percent before closing down 1 percent at $30.99 in New York today. Whiting climbed as much as 9.3 percent before closing up 3.9 percent at $43.92. The gain was the second-biggest among 72 companies in the Russell 1000 Energy Index, data compiled by Bloomberg show.

Exxon, ConocoPhillips

Falling costs to find and extract oil from the Bakken is luring producers such as Exxon and ConocoPhillips, according to Jason Wangler, a Houston-based analyst for SunTrust Robinson.

Costs at Enid, Oklahoma-based Continental Resources, the most leveraged explorer to the Bakken after Whiting, have plummeted about 60 percent to $9.63 a barrel of oil equivalent since 2008, data compiled by Bloomberg. That’s $4.58 less per barrel than Exxon’s expense.

“We get approached all the time” by potential buyers, Kristin Miskovsky, a spokeswoman for Continental Resources, said in a telephone interview. “Our policy is not to comment on speculation.”

Shares of Continental Resources slid 0.8 percent to $58.37 today in New York.

While RBC Capital’s Hanold said Exxon may want to increase its position in the Bakken through acquisitions, Mumbai-based Reliance, India’s biggest company by market value, and The Hague-based Shell, Europe’s largest oil company, may be among other buyers, according to SunTrust Robinson’s Wangler.

Asian Companies

Jeffrey Neu, a spokesman for Exxon, said the company doesn’t comment on industry rumors or speculation. Kelly op de Weegh, a spokeswoman for Shell, declined to comment. Manoj Warrier, a spokesman for Reliance, didn’t respond to a telephone call or e-mail outside normal business hours.

Bakken shale oil companies may also attract interest from Chinese energy companies, SunTrust Robinson’s Wangler said. Asian companies may spend $150 billion on takeovers in the next five years to secure energy resources for their faster-growing economies, according to Sanford C. Bernstein & Co.

Although the Bakken formation contains so-called light sweet crude oil that commands higher prices, one challenge for companies looking to shore up acreage in the region is a lack of pipelines to transport the oil to areas with higher demand, according to Bloomberg Industries’ O’Neill. Fracking may also cause serious environmental damage unless companies commit to the best engineering practices, a task force commissioned by U.S. Energy Secretary Steven Chu concluded in August.

Still, with oil approaching $90 a barrel and the breakeven price for production from Brigham’s Bakken acreage at just $55 a barrel, the Statoil deal may spur more acquisitions of shale oil assets in the area, SunTrust Robinson’s Wangler said.

“We may look back on this transaction as the start of a major consolidation,” he said. “It would be very tough to assemble a package of acreage without buying somebody out.”

--With assistance from Bradley Olson in Houston. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Susan Warren at susanwarren@bloomberg.net.


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