It's articles like this that always catch my eye:
http://www.nytimes.com/2006/06/24/business/24energy.html?_r=1&oref=login
If that link doesn't work, try going to Yahoo news and looking up Oil and Gas, you'll find the link.
If there was so much oil & gas reserves to be had, it wouldn't make a whole lot of sense to purchase competitors at times when energy prices are at historical highs.
Quote from the article:
"With the sector swimming in cash and growth opportunities limited, we expect more deals," William A. Featherston, an analyst with UBS, wrote in a note to investors...High energy prices have not deterred energy executives from paying substantial premiums to grab reserves.
Whatever the spin coming from anyone else, I think if you look at the stories and think about it, peak oil (or at least plateau oil) makes a whole lot of sense.
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Anadarko to buy Kerr-McGee and Western Gas
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Anadarko to buy Kerr-McGee and Western Gas
by jdmartin » Mon 26 Jun 2006, 09:57:50
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
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Re: Anadarko to buy Kerr-McGee and Western Gas
by mekrob » Mon 26 Jun 2006, 11:08:28
This is actually a pretty good deal. The deal is for about 20 billion and the combined reserves of both are about a billion barrels, or about $70 billion dollars, although this isn't quite right as Western is mostly gas and Kerr-McGee has a lot of gas as well which has a different price currently (but this will change much quicker than oil). Kerr-McGee also had a 150% reserve replacement ratio last year, but this included acquisitions, so I'm not so sure how great they are with actual reserve growth.
Basically, Anadarko was very smart and paid pretty cheaply for the worth of this deal. Kerr-McGee is great with deep-waters in the Gulf and Western has some prized fields in Wyoming. Both of these are critical for an oil company's success in the future.
Anadarko is now the fifth largest oil company in the US, up from seventh. But probably about 20th on the world stage.
And yes, this has PO written all over it. Cheap oil is over. Now you buy up the smaller companies with specialities (deep water and gas). I believe Kerr-McGee has some really good connections and fields in key locations around the world (Libya, Nigeria, China, etc) that Anadarko didn't have.
Basically, Anadarko was very smart and paid pretty cheaply for the worth of this deal. Kerr-McGee is great with deep-waters in the Gulf and Western has some prized fields in Wyoming. Both of these are critical for an oil company's success in the future.
Anadarko is now the fifth largest oil company in the US, up from seventh. But probably about 20th on the world stage.
And yes, this has PO written all over it. Cheap oil is over. Now you buy up the smaller companies with specialities (deep water and gas). I believe Kerr-McGee has some really good connections and fields in key locations around the world (Libya, Nigeria, China, etc) that Anadarko didn't have.
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Re: Anadarko to buy Kerr-McGee and Western Gas
by rockdoc123 » Mon 26 Jun 2006, 12:43:13
Consolidation in the oil and gas business is not something new. We went through a huge consolidation in the eighties through nineties. Literally a hundred independant companies that devolved down to about 10.
Now you could argue that this was at a time when oil prices were relatively low, but so were exploration and development costs. If you look at North America or the North Sea finding and development costs are now in the $12 - $14/bbl range, with higher oil prices so rise the costs of drilling, steel etc.
As long as a company can purchase reserves at a rate below current average F&D it should be accretive to their bottom line. This especially makes sense for Anadarko as the Kerr McGee acqusition fits hand in glove with their current business interests.
Now you could argue that this was at a time when oil prices were relatively low, but so were exploration and development costs. If you look at North America or the North Sea finding and development costs are now in the $12 - $14/bbl range, with higher oil prices so rise the costs of drilling, steel etc.
As long as a company can purchase reserves at a rate below current average F&D it should be accretive to their bottom line. This especially makes sense for Anadarko as the Kerr McGee acqusition fits hand in glove with their current business interests.
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Re: Anadarko to buy Kerr-McGee and Western Gas
by jdmartin » Mon 26 Jun 2006, 12:59:15
$this->bbcode_second_pass_quote('rockdoc123', 'C')onsolidation in the oil and gas business is not something new. We went through a huge consolidation in the eighties through nineties. Literally a hundred independant companies that devolved down to about 10.
Now you could argue that this was at a time when oil prices were relatively low, but so were exploration and development costs. If you look at North America or the North Sea finding and development costs are now in the $12 - $14/bbl range, with higher oil prices so rise the costs of drilling, steel etc.
As long as a company can purchase reserves at a rate below current average F&D it should be accretive to their bottom line. This especially makes sense for Anadarko as the Kerr McGee acqusition fits hand in glove with their current business interests.
Now you could argue that this was at a time when oil prices were relatively low, but so were exploration and development costs. If you look at North America or the North Sea finding and development costs are now in the $12 - $14/bbl range, with higher oil prices so rise the costs of drilling, steel etc.
As long as a company can purchase reserves at a rate below current average F&D it should be accretive to their bottom line. This especially makes sense for Anadarko as the Kerr McGee acqusition fits hand in glove with their current business interests.
Rockdoc, you generally have good posts on here and I respect your point of view. Having said that, your reply here seems indicative of an attempt to "muddy the waters", so to speak, by using a+b does not equal c, contrary to the very information you provided.
"As long as a company can purchase reserves at a rate below current average F&D". Why is current F&D so expensive that it makes sense to simply buy up other company's reserves? Could it be, at least in part, because it is getting harder to find anything worthwhile?
I understand there's been plenty of past consolidation. If you used Mekrob's numbers above (I have no idea if they're correct or not), you come up with roughly $50/bl reserves. While there may be additional value to the company (options, contacts, etc), that is still an awful lot of money to pay for reserves if you held any kind of idea that oil was so plentiful out there that the day was coming that prices would be moderating in the other direction.
I don't claim that a consolidation is the indication of peak oil. What I do say is that if you look at the news articles and read the stories, as a whole, it fairly strongly supports the idea of oil peaking or plateauing. I think a constant position, such as that you appear to have taken, of "that information isn't indicative of anything, there's not enough information to know anything" is disingenous.
After fueling up their cars, Twyman says they bowed their heads and asked God for cheaper gas.There was no immediate answer, but he says other motorists joined in and the service station owner didn't run them off.
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Re: Anadarko to buy Kerr-McGee and Western Gas
by mekrob » Mon 26 Jun 2006, 13:25:44
$this->bbcode_second_pass_quote('', 'I')f you used Mekrob's numbers above (I have no idea if they're correct or not), you come up with roughly $50/bl reserves
Ah, sorry about that.
Kerr-McGee: 898 million barrels equivalent
Western Gas: 153 million barrels eq
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Re: Anadarko to buy Kerr-McGee and Western Gas
by rockdoc123 » Mon 26 Jun 2006, 14:59:34
$this->bbcode_second_pass_quote('', 'W')hy is current F&D so expensive that it makes sense to simply buy up other company's reserves? Could it be, at least in part, because it is getting harder to find anything worthwhile?
not muddying the waters at all....what I provide is information and my perspective.
You could argue that a part of the reason North Sea F&D has risen is because pool sizes are smaller, but the main culprit is rig costs. We are now talking about $450K/d whereas a couple of years ago $150K/d was not unheard of for a small floater. So basically the barearse rate results in a D&A well cost of $10 MM soaring to a D&A of $30 MM. As another example I am very familiar with the cost of jackups in the Arabian/Persian Gulf....going rate is now $140K/d versus year ago rate of $50 K/d. Add to that the fact that price for steel, consumables and labor have also skyrocketed and you can see the problem. The rising F&D is happening everywhere...including basins that still have a fair bit of "biggish" reserve potential such as GOM, Brazil, Nigeria and Angola ultradeep water.
If you've read my other posts you would see that I have said on numerous occassions it is getting harder to find quality reserves, the opportunities are few and far between. That being said it likely has little to do with Andarko's decision to purchase versus explore with that same capital.
Heres' a quote from MSNBC money:
$this->bbcode_second_pass_quote('', 'F')or Kerr-McGee, Anadarko is paying a 40% premium of $70.50 per share in cash (a total value of about $18 billion). On a straight calculation, that values Kerr-McGee at about $20 per barrel of oil equivalent (BOE). That doesn't account for possible divestiments, nor for the potential to reap production greater than today's proven reserves. Anadarko management projects roughly 3.1 billion BOE in total recoveries from the Kerr-McGee assets, at a full-cycle cost of $12.40 per BOE.
For Western Gas, the price was $61 a share (a 49% premium) and a total value of $5.3 billion. On a straight calculation, that's more than $34.50 per BOE -- but again, that figure is deceptive. In addition to Western Gas's probable additions to the reserve base (it has some sizable coalbed methane opportunities), roughly $1.6 billion of the purchase price will be assigned to Western Gas's midstream operations. That will lower the initial straight calculation to something closer $24 per BOE. In this case, Anadarko management is projecting about 705 million BOE of total recoveries, at a full-cycle cost of around $9.50 per BOE.
And I would remind you that this calculation is based soley on SEC reported reserves which usually is close to proven plus half of actual probable. So you still have the possible reserves plus the acreage position for additional exploration, which is one of the main drivers in the deal. When it is all said and done I would suspect the deal will net out around $6/boe for all reserves, possibly lower if there is a lot of additional exploration discoveries, assuming oil prices don't retreat too much from current levels in the near future.
Independant oil companies exist only for the purpose of creating shareholder value. This can be done in three ways: 1. explore and develop, 2. acquisition of reserves through asset or company purchase and 3. buyback shares. Companies will do that which generates the highest profit to investment ratio on a discounted basis. They are limited in terms of how many shares they can buy back so basically it comes down to a decision...explore or acquire. There are other limits to exploring that are somewhat independant of peak oil. As an example competition from national oil companies has increased considerably...they are driven by different economics and can often out-compete independants in many places. There is also problems with security of investment in places such as Nigeria where companies find their stock price discounted if they invest heavily (Shell as an example). And there is also the issue of growing nationlism in countries like Venezuela which can limit access to the independant.
So if a deal comes along where you can replace and grow reserves for your company at realitively low risk and with economics that are comparitively reasonable, why would you take on the added risk of exploration?
Why did this acqusition happen now? Look at the market, oil is still around $70/bbl but almost all of the independant oil and gas companies have lost anywhere from 25% - 35% share value over the last few months thanks to a combination of the Fed and "go away in May syndrome". These companies are still benefiting from the large profits generated by the high oil prices and are hence currently wildly undervalued. Note that many companies were trading around 6 times forward cashflow in December and are now trading somewhere around 3.5 to 4 times forward cashflow. A huge buying opportunity, which is why you are likely to see more consolidation in the next few months before this correction is over. Just think what this purchase would look like if KMG/Andarko share price rises to it's recent high....basically Andarko will have bought KMG for much, much less. From a financial perspective this is an extremely good deal if you think the stock market correction is not the start of a long term bear market.
$this->bbcode_second_pass_quote('', 'I') don't claim that a consolidation is the indication of peak oil. What I do say is that if you look at the news articles and read the stories, as a whole, it fairly strongly supports the idea of oil peaking or plateauing. I think a constant position, such as that you appear to have taken, of "that information isn't indicative of anything, there's not enough information to know anything" is disingenous.
Not sure what you are reading into the news stories "as a whole". But all the KMG/Anadarko blurbs say to me is that another large independant has chosen to get larger by acquisition rather than exploration (something that has been going on for a couple of decades) and that the deal looks pretty good for both parties....hardly disingenuous. I can assure you I have experience in this sort of thing....."peak oil" is not discussed amoungst the senior management when they make a decision on a corporate acqusition. It is simply, do the metrics work or not and how will this purchase be percieved by our shareholders.
I think it is important that one separate factual information from interpretation. This is especially true when there appears to be a plethora of folks on these forums who would read "peak oil" into pretty much anything that happens.
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