Energy and oil deals are dominating the world's mergers and acquisition landscape as the demand for energy escalates, especially in developing countries. One such major deal is the acquisition of exploration, development, and production company Brigham (NYSE: BEXP) by Norwegian oil giant Statoil (NYSE: STO) for around $4.4 billion. It is an all-cash acquisition for $36.50 per share, which is a 20% premium to the Oct. 14 closing price. The premium is less than the 23% industry average this year.
The interest
For Statoil, capacity at the North Sea has been declining and the company also missed its production targets last year. With the help of technology and new drilling methods, it is becoming feasible to drill oil from unconventional areas at a lower cost. This has led Statoil to invest in the best unconventional areas that promise longer field life.
Statoil entered the U.S. shale gas industry back in 2008 by acquiring a stake in Marcellus shale gas acreage from Chesapeake (NYSE: CHK) and then in Eagle Ford from SM Energy (NYSE: SM) with Talisman (NYSE: TLM). Statoil produces dry gas from Marcellus, dry gas and liquids from Eagle Ford, and now with the acquisition of Brigham, liquids from Bakken. Outside the U.S., Statoil is also expanding in the Gulf of Mexico, Angola, and Brazil.
Statoil's Brigham purchase is part of one of the largest oil accumulations in the U.S., with estimated recoverable reserves of 5 billion to 24 billion barrels of oil equivalent spread over 38,000 square kilometers. Equity production from the 375,000 net acres in the Williston basin is estimated to increase from its current level of 21,000 BOE per day to 60,000-100,000 BOE per day over a period of five years. The presence of rich reserves promises higher production and greater field life for Statoil.
The prospect
The acquisition of Brigham has positioned Statoil strongly against competitors such as ConocoPhillips (NYSE: COP) and ExxonMobil (NYSE: XOM), which are the existing acreage holders in the Bakken shale area. The acquisition also gives Statoil immediate operatorship of productive oil wells, producing at its peak 2,800 BOE per day.
The presence of Statoil in most of the unconventional areas makes one thing clear -- it is focusing on unconventional energy resources like natural gas and tight oil that are seeing higher demand in the face of curbing harmful gas emissions into the atmosphere. Tight oil produced from Bakken shale emits less harmful gases and its extraction has increased in recent years. There are similarities in the extraction of shale gas and tight oil. Statoil already has experience in extracting shale gas, providing it an advantage in utilizing the resource.
Unconventional areas provide two big advantages to their operators. First, rich reserves -- it adds to the field life of the operator and guarantees resources for years to come. Secondly, low cost of production.
Statoil estimates the breakeven production price of Bakken shale to be around $55 per barrel, providing the company a healthy margin on its sales price. The acquisition is a part of Statoil's strategy to focus on upstream activities after it spun off its gas station business.
The Brigham deal also provides Statoil a holding interest in 40,000 net acres in other areas along with 690 kilometers of oil, natural gas, and water transportation systems in the Williston basin.
Foolish takeaway
Statoil is concentrating on unconventional areas and upstream activities, which are more lucrative and provide new avenues of growth with the introduction of new technology. The acquisition of Brigham leads to the fulfillment of both these strategies and is definitely a good move on the part of the company.
- To add Statoil to your watchlist, click here.
- To add Brigham to your watchlist, click here.
- To add ConocoPhillips to your watchlist, click here.
- To add ExxonMobil to your watchlist, click here.
- To add Chesapeake to your watchlist, click here.
- To add SM Energy to your watchlist, click here.
- To add Talisman to your watchlist, click here.
