Wednesday, March 3, 2010

BP Gets into Eagle Ford Shale

Yesterday BP announced a 50/50 joint venture deal with privately held Lewis Energy of San Antonio, TX to explore Lewis' 80,000 acres in the Eagle Ford Shale in southwest Texas.  Lewis currently operates one rig in the play and may add another one.  Details are a little murky at this point as to who will be the operator and the value of the deal, which I've seen range from $160 million (WSJ) to $200 million (Reuters UK) for the 50%, which implies a valuation of $4,000 to $5,000 per acre. 

I think we will see a few more of these types of deals between smaller independents and major integrated energy companies in the various shale plays of North America.  The question is whether the joint venture or the corporate acquisition (i.e. Exxon/XTO) will be the preferred deal type.  I'm guessing the former, but we'll see.

The announcement came as part of BP's larger discussion of corporate strategy.  In reviewing the document, I'm struck by a few things. First, the supermajor integrated energy companies are wildly complex beasts.  It seems simple enough when thinking upstream-midstream-downstream, but the devil is in the proverbial details.  Presenting the big picture strategy makes you think of the depth of these companies. 

Second, while the Eagle Ford deal was not the big news of the day, it stuck out to me as being the piece that didn't really fit in with the rest of the upstream puzzle.  Companies like BP depend on large fields and mega projects.  Just look at some of the projects in our backyard (the Gulf of Mexico):  Horn Mountain, Mars, Mad Dog, Na Kika, Atlantis.  These are huge wells with billions of dollars of capital invested.  Compare that to developing hundreds of onshore natural gas wells in Texas and Louisiana.  We think these wells are expensive, but $7-9 million is a rounding error for a company like BP.  This kind of "whack-a-mole" development is a different discipline for a big company.  In its strategy presentation, BP points to "low cost 'factory' production" as its way of achieving scale in a shale play, but what if it turns out to be more hunt and peck like Arthur Berman suggests?  It will be interesting to see how they perform against the natural gas independents.

Third, in reviewing BP's strategy, you realize how important alternative energy will be for supermajors going forward.  Being somewhat cynical, I've dismissed the TV commercials for Exxon and BP as make-nice P.R., but these are energy companies with a very long term time horizon, not just oil and gas companies.  If all they do is produce hydrocarbons, they will severely limit themselves in the future and end up like the dinosaurs from which they now extract oil. 

Right now it seems as though the alternative energy push has been more about P.R. than progress, but I am starting to believe that these companies realize the importance of investing real R&D funds in finding/creating new energy sources.  I'm interested to see where the real alternative energy innovation originates.  Will it be places like Silicon Valley, where the Bloom Energy fuel cell has been attracting fawning media attention, or the supermajor energy companies, which seem to be producing more slick TV commercials that fully developed alternative energy products?

No comments: