Overpaying in the Oil Patch

Two weeks ago, we detailed Houston-based Plains Exploration & Production's (NYSE: PXP  ) plan to exit the Gulf of Mexico. Having kicked its shallow water properties to McMoRan Exploration (NYSE: MMR  ) , the company is now shopping around its remaining assets in the deepwater. Meanwhile, the company is doing some shopping of its own.

Today, Plains Exploration announced a $578 million acquisition in the Eagle Ford shale play in South Texas. I believe that EOG Resources (NYSE: EOG  ) , which will jointly operate about a third of the acreage, is the vendor of the entire package, but Plains Exploration didn't make that explicit.

I've noted that Plains Exploration risks being late to the party in terms of picking up onshore oil assets in the wake of an industrywide scramble that started well over a year ago. The transaction metrics here provide some evidence of that. The company is picking up 60,000 acres at a cost of more than $9,600 per acre. Compare this with how the company itself breaks down the purchase price in its investor presentation today:

  • $100,000 to $125,000 per flowing barrel x +/-  2,000 barrels per day = $200 million to $250 million
  • 60,000 net acres x $6,300 to $5,467 per acre = $378 million to $328 million

If you want to break out a separate value for the producing acreage, and slap a per-acre value on the undeveloped stuff, that's totally fine, but this looks like double-counting to me.

Any way you slice it, this acreage isn't coming cheap. Rather than focusing on California, where Plains Exploration arguably has an early mover advantage, it is jumping into one of the most overcrowded plays in North America. The sheer volume of activity is driving up the costs of drilling and completing wells, so that compounds the issue of potentially overpaying for acreage at this stage.

Look, not everyone can be a leader in this industry. There are only so many companies, like Range Resources (NYSE: RRC  ) in the Marcellus or Ultra Petroleum (NYSE: UPL  ) in the Pinedale, that can get in early and lock up a low-cost, commanding position in a given play. The "acquire and exploit" model, perhaps executed most masterfully over the past decade by XTO Energy, is one that can richly reward shareholders. This purchase by Plains Exploration could work out fabulously well, but as with Sandridge Energy's (NYSE: SD  ) acquisition in the Permian earlier this year, I'm a bit skeptical.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Fool owns shares of Ultra Petroleum. The Fool has a disclosure policy.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1322618, ~/Articles/ArticleHandler.aspx, 11/28/2014 7:34:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 18 minutes ago Sponsored by:
DOW 17,828.24 0.49 0.00%
S&P 500 2,067.56 -5.27 -0.25%
NASD 4,791.63 4.31 0.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

11/28/2014 1:01 PM
EOG $86.72 Down -7.35 -7.81%
EOG Resources, Inc… CAPS Rating: *****
MMR $0.00 Down +0.00 +0.00%
McMoRan Exploratio… CAPS Rating: ****
PXP.DL2 $0.00 Down +0.00 +0.00%
Plains Exploration… CAPS Rating: ***
RRC $65.65 Down -3.11 -4.52%
Range Resources CAPS Rating: ***
SD $2.81 Down -0.99 -26.05%
SandRidge Energy CAPS Rating: ****
UPL $19.85 Down -1.57 -7.33%
Ultra Petroleum CAPS Rating: ****

Advertisement