Deals of the Week – SandRidge Makes a Swoop for Dynamic Offshore Resources

SandRidge Energy made a move for private Gulf of Mexico company, Dynamic Offshore Resources this week in a cash and stock deal worth $1.26 billion. The move comes 5 months after Dynamic issued a prospectus for an IPO to raise up to $400 million and just 1 day after the company postponed the IPO citing “market conditions”. Being a private company, Dynamic doesn’t have to undergo the rigmarole of seeking public acceptance for the deal which being on par with the expected returns from the IPO, has been accepted.

SandRidge will gain 62.5 million boe of proven reserves in the Gulf of Mexico, equally weighted between oil and gas and 25,000 boe/d of production. The operating metrics after accounting for the probable reserve upside look favourable at $18.60 per 1P boe and $46,500 per producing boe. Additionally the assets have a reserve life index of 6.8 years on a 1P basis and the earnings multiple based on the Dynamic’s EBITDA, including the recently acquired XTO assets is 2.9 years.

Dynamic are a company with a relatively low level of debt, the majority of which was expected to be paid off with the proceeds from the previously planned offering. The conventional logic behind a deal paid for partly in equity would be for the smaller target company to benefit from its existing portfolio, by teaming up with a well-capitalized partner who can accelerate development of the assets. SandRidge Energy, however, are a company who not so long ago were running the risk of slipping into bankruptcy, having taken on too much debt at a time when operations were dominated by US gas production. This was during 2009 and early 2010 when gas prices were steadily falling on the back of oversupply in the market. This led to SandRidge slipping into negative shareholders equity, i.e. the book value of the company was theoretically less than worthless. Since that time however, SandRidge has been successful in turning into an oil weighted producer, has kept its debt under control and can now boast of a positive book value again. Despite the positives, the share price of SandRidge dropped by over 10% on the announcement over fears that the company was taking on too much debt and risk too soon after steadying the ship.

In Canada, Grizzly Oil Sands acquired the May River property from PetroBank Energy and Resources for C$225 million. The May River is an Oil Sands project which is intended to be developed via SAGD technologies. The project holds 90.6 million boe of probable reserves and 624 million boe of contingent reserves, which equates to just C$0.32 per boe on a contingent reserve basis. To find a cheaper oil sands deal valued with this metric, we have to go back to 2005 when Sinopec acquired a 40% interest in the Northern Lights Project. The price of oil, however, was just above $50 per barrel back when that deal was struck as opposed to today’s $100 trading price.

ExxonMobil downsized their Japanese downstream portfolio this week in a deal with TonenGeneral worth $3.9 billion. The deal will result in ExxonMobil’s interest in 3 of their 4 refineries in Japan reducing from 50.5% to 22%. The deal comes in a week where the refining sector has been grabbing the headlines for its poor performance in the latest earnings releases from the majors over the past two weeks. Of the 9 companies with refining operations that have reported Q4 earnings in the Evaluate Energy database so far, all have posted a decrease in earnings compared to Q3 2011, and all but one has posted a quarter-on-quarter decrease in normalized R&M earnings.

Deals of the Week 

Evaluate Energy is a leading
data provider Oil & Gas professionals and the financial services
industry. The Oil Blog is written
by members of their team of professional analysts and provides comment
on market movement and industry trends within the oil industry.