Deals of the Week: EP Energy Corporation and Cove Energy Find their Suitors

In a week where confidence has been returning to the oil market in tandem with the increasing oil price, two companies that have been in the shop window over the past few months have found willing acquirers. El Paso’s E&P division attracted the larger of the two bids of $7.15 billion from Apollo Global Management and Riverstone Holdings whilst the sale of Cove Energy has ignited a bidding war between Shell and PTT, which has pushed the price up to a current $1.8 billion.

El Paso’s exploration and production division has been on the market since Kinder Morgan Inc announced a $38 billion takeover of the company in October 2011 and immediately stated its intention to divest all non-midstream assets. The final offer falls short of the value implied by the EBITDA multiple in the Kinder Morgan/El Paso deal, had the E&P division received the same premium, and short of Evaluate Energy’s prediction at the time of $8 billion. However, the Henry Hub benchmark price of gas has fallen from $3.39 per mcf to just $2.55 per mcf since the announcement of Kinder Morgan’s intent to sell.

El Paso has 3.7 million acres across the US which dwarfs the likes of Petrohawk’s 770,000 acres (who were acquired for $12 billion last year). The company is hampered by the fact that 85% of its production is composed of US gas and therefore exposed to the low natural gas prices. Also only a small proportion of El Paso’s leasehold comes from the US shale plays which has been the main driver of M&A activity in the country over the past 3 years.

Cove Energy attracted firstly a $1.6 billion offer from Royal Dutch Shell but this was then usurped just two days later by the Thai based NOC, PTTEP who offered £2.20 a share, valuing the full capital of Cove at $1.8 billion. By the close of trading in London on Friday the share price of Cove stood at £2.40 indicating that a further offer by Shell is expected soon. The motivation for Shell and PTT to take over the assets of Cove is to get a foothold into the growing East African gas sector. A few years ago this region was largely unexplored, but since this time huge gas fields have been unearthed by Anadarko and ENI in Mozambique and Statoil in Tanzania which will justify a significant LNG sector off the East coast of Africa to supply the Asian markets. Cove is an equity partner in Anadarko’s discoveries in the Rovuma Offshore Area 1 block which are currently estimated to hold as much as 30 TCF of gas. Cove also holds further acreage offshore Kenya but recently entered a deal to dispose of its Tanzanian asset to Wentworth Resources.

Mitsubishi entered their second significant farm-in in recent weeks with a $280 million deal in Papua New Guinea with Talisman. This adds to the $2.9 billion farm-in of Canadian shale gas assets with EnCana last week. The deal involves 9 blocks which are not currently producing but are believed to contain enough resources to warrant an LNG export terminal.

Centrica continued their aggressive start to 2012 with another acquisition in the North Sea, this time via a deal with Total for $386 million. This adds to the $223 million deal with ConocoPhillips for the Statfjord field, the acquisition of the Fogelberg discovery and the award of 7 exploration licenses in Norway since the start of the year. Unlike other recent acquisitions by the company, this deal is weighted towards oil, with a 64% weighting for the 22 million boe of reserves being acquired (on a 2P basis).

In the oil services sector, URS Corporation acquired Flint Energy Services for C$1.475 billion. The acquisition metrics look high in regards to the EBITDA and cash from operations with multiples of 14.6 and 15.7 respectively. Flint Energy Services is a North American oil services company that specialises in the booming shale resource extraction industry.

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