The oil and gas boom in North America set off a wildcatting-style rush to claim lands in the new oil and gas fields. Many companies wanted a piece of the pie, and it looks like much of the premium real estate has been claimed. Now the only way for a company to substantially grow its business will be to make an acquisition or two -- and it looks like the race to buy is under way.
Let's party like its 1849
Reserves are up, production is up, and prices are down; put these together, and upstream companies are on the losing side of operating margins. When events like this happen, companies with the strongest financial positions will try to take advantage of those in weaker standing. Some cash-strapped companies may be forced to sell off assets or discontinue operations in order to make ends meet. A recent example of this is Enerplus Resources Fund (NYSE:ERF), which plans to let its Marcellus Shale leases in West Virginia and Maryland expire at the end of the year.
During Linn Energy's (NASDAQOTH:LINEQ) recent earnings call, their CFO Kolija Rockov claimed that there are $20 billion-$30 billion in assets coming onto the market soon. Since I recently discussed Linn's intention to buy, let's take a look at some other companies who also plan to make acquisitions in 2013.
On Oct. 17, ExxonMobil (NYSE:XOM) agreed to buy Canadian oil company Celtic Explorations for $3.1 billion. By any measure, $3 billion is a large acquisition, but Exxon produced over $13 billion in operational free cash flow last quarter, so the purchase is not as much of a concern as the potential of Celtic's holdings. Celtic has large tracts of land in the Montney Shale and Duvernay Shale plays in Alberta and British Columbia. These two fields could contain some of the largest natural gas reserves in North America, and could potentially power the U.S. for over a century.
Vanguard Natural Resources (NASDAQOTH:VNRSQ) has plans to buy oil and gas plays from several undisclosed owners in Montana. While the $121 million price tag isn't going to strain a $1.5 billion market cap company, it expands Vanguard's existing Big Horn Basin profile. Big Horn has treated the company well; today, it represents more than 12% of its proven reserves.
Plains Exploration & Production (UNKNOWN:UNKNOWN) is in talks with BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS-B) to buy $6.1 billion worth of deepwater assets in the Gulf of Mexico. This is a pretty risky move for Plains. To make the deal happen, it will sell $2 billion of its stakes in several onshore holdings and hedge $1 billion of their oil output. These two moves will help keep the company from fully financing the move through debt and equity, but Plains will still take on a good amount of debt to make it happen. This deal has several investors scratching their heads, because Plains sold all of its near-offshore assets in the Gulf only two years ago to focus on its onshore production. This could be a difficult pivot for the company as it learns the ropes of deepwater drilling. BP and Shell will receive $5.55 billion and $560 million in the deal, respectively.
Occidental Petroleum (NYSE:OXY) could be in the market as well. Rumors abound that Occidental has plans in place to buy privately held Yates Petroleum for about $3 billion. Yates holds large fields in the New Mexico portion of the Permian Basin. Since Occidental already has a strong presence in that region, these assets could fit well into the asset portfolio of Occidental.
SandRidge Energy (UNKNOWN:SD.DL) is doing a new dance, and it's called the asset shuffle. After buying Dynamic Offshore for $1.5 billion back in February, it now intends to sell off its holdings in the Permian Basin in West Texas. During its recent conference call, the company's executives said they plan on using the profits from any Permian sale to both pay down debt and to increase their presence in the Mississippian Lime formation of Kansas and Oklahoma. The move is designed to concentrate all of the company's onshore holdings in the Mississippian Lime formation. This will allow SandRidge to more effectively produce there.
What a Fool believes
The Exxon, Occidental, and Vanguard deals make sense for each respective company, both financially and strategically. None of these companies will strain their financial position with these acquisitions. They also make sense from an operational standpoint because they either expand into fields with high potential, or they centralize the company's holdings.
Plains' deal could be very risky. If the company can get those new offshore fields up and running smoothly, it will score a huge win. But it will be challenging to bring an acquisition of that size into the fold.
Fool contributor Tyler Crowe owns shares of Linn Energy. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.