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Adrian Goodisman Managing Director May 18, 2006

A&D Market Update Presented to MOGA. Adrian Goodisman Managing Director May 18, 2006. Agenda. Scotia Waterous is pleased to have the opportunity to present its thoughts on the national acquisition and divestiture market. Scotia Waterous Introduction U.S. A&D Market Update

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Adrian Goodisman Managing Director May 18, 2006

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  1. A&D Market Update Presented to MOGA Adrian GoodismanManaging Director May 18, 2006

  2. Agenda • Scotia Waterous is pleased to have the opportunity to present its thoughts on the national acquisition and divestiture market. • Scotia Waterous Introduction • U.S. A&D Market Update • Onshore Case Study

  3. Scotia Waterous Introduction

  4. Summary Scotia Waterous Introduction • Leading Upstream Focused M&A Firm in the World • Global offices: Houston, Denver, Calgary, London, Buenos Aires, Singapore • Unrivalled Market Intelligence • Conducting 50+ mandates per year globally • Selling over $500 million/month in oil and gas transactions • Proprietary databases on global transactions and oil and gas companies • Most Comprehensive Technical Capabilities and Broadest Relationships • 75 + staff world wide • Engineers, Geologists, Geophysicists and Investment Banking backgrounds • Advised 23 of the 25 largest oil and gas companies in the world over past 18 months, as well as many smaller private and public companies • Access to senior management on several continents • In 2005 Scotiabank, through its Investment Banking subsidiary Scotia Capital, acquired Waterous & Co. to create a full-service upstream M&A firm. • Scotia Waterous combines the engineering and geoscience technical knowledge of Waterous with the capital markets knowledge and financing capability of Scotia Capital • Full service M&A advisory services covering technical analysis of assets, financial analysis, financing, and execution strategy • Scotiabank Quick Facts • Canada’s most international bank and second largest bank • Maintained energy lending office in Houston since 1962 • Currently banking over 30 U.S. E&P clients

  5. Scotia Waterous Worldwide Activity Global A&D Trends • Since January 2005, Scotia Waterous has offered over $20 billion globally in oil and gas companies and assets, including over $11 billion in North America.

  6. Recent U.S. Advisory Mandates Kerr-McGee Corporation Kerr-McGee Corporation Advised on Permian and Advised on South Texas Mid-Continent divestiture to divestiture to Encore Acquisition Company The Houston Exploration Company $104,000,000 $163,000,000 Exclusive Financial Advisor Exclusive Financial Advisor October 2005 October 2005 Pecos Production Company Everlast Energy LLC Advised on corporate sale to Advised on divestiture to for for Undisclosed $200,500,000 Exclusive Financial Advisor Exclusive Financial Advisor June2005 May 2005 Scotia Waterous Introduction • Since January 2005, Scotia Waterous has advised on approximately $4.0 billion in oil and gas assets in the United States.

  7. U.S. A&D Market Update

  8. Commodity Price and Capital U.S. A&D Market Update • Strong commodity prices, especially oil, have resulted in substantial cash flow, creating additional buying power for most E&P companies. NYMEX Henry Hub1 Cash Flow Leverage Start of 4Q/05 Start of 1Q/05 Start of 2Q/06 Current Strip Majors Large Cap Mid Cap Small Cap Net Debt/EBITDA (x) NYMEX Henry Hub Natural Gas ($/MMBtu) Current Strip May 8, 2006 Months Forward NYMEX WTI Excess Cash Flow 2005 Op Costs G&A Int. Exp. Capex Excess CF Current Strip May 8, 2006 NYMEX WTI Crude Oil ($/bbl) Start of 4Q/05 Start of 1Q/05 Start of 2Q/06 Current Strip Months Forward Note: (1) Natural gas futures have been “smoothed” to mitigate the impact of seasonality.Source: Scotia Waterous, Bloomberg.

  9. Cash Flow vs. Asset Supply U.S. A&D Market Update • While asset supply has increased over the past few years, it is not nearly enough to satisfy demand generated by the rapid increase in industry cash flow. Cash Flow vs. Asset Supply Cash Flow Asset Supply Average Yearly Spot NYMEX Henry Hub ($/MMBtu) ($ Billions) Note: (1) Cash flow figures represent public independents. Source: Scotia Waterous, Bloomberg.

  10. U.S. Quarterly Transaction Trends U.S. A&D Market Update • Recent transaction supply value increased due to select large scale divestitures. The number of transactions fluctuates due to a mixture of factors, including high commodity prices, corporate growth targets and retention of bottom tier assets. U.S. Asset Transactions 2000-2006 2-year Quarterly Average ~$4,000MM Transaction Value – Gas Transaction Value – Oil Transaction Value – Undisclosed Transactions (#) 4-year Quarterly Average ~$1,500MM Transaction Value ($MM) Transactions (#) Source: Scotia Waterous, J.S. Herold.

  11. Supply/Demand Imbalance – Buyer Profile U.S. A&D Market Update • Traditionally, Large Caps have been the dominant buyers. However, W&T’s $1.34 billion acquisition of Kerr-McGee’s Gulf of Mexico assets have made Mid Caps a close second in YTD 2006. U.S. Market Segmentation by Asset Value 2002 2003 2004 2005 YTD 2006 Chesapeake/Undisclosed Marubeni/Pioneer LCX Acq’n TXOK Black Stone W&T/Kerr-McGee Oxy Statoil XTO Apache Burlington Hunt Petr. Merit Celero Transactions by Company Category as % of Total Transaction Value Apache XTO Whiting (1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.

  12. Supply/Demand Imbalance – Seller Profile U.S. A&D Market Update • Large caps became the leading sellers in 2005 and YTD 2006, when both Pioneer and Kerr-McGee divested their Gulf of Mexico assets. Privates came second during the same periods. U.S. Market Segmentation by Asset Value ExxonMobil Amerada Total Shell 2002 2003 2004 2005 YTD 2006 Anschutz Celero Winwell SG Interests LLOG CrownQuest Pioneer Devon EnCana Kerr-McGee Marubeni/Pioneer W&T/Kerr-McGee ExxonMobil Chevron Transactions by Company Category as % of Total Transaction Value Chesapeake/Undisclosed Anadarko (1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.

  13. Proved Reserve Valuations 2Q 2005 – 1Q 2006 U.S. A&D Market Update $1.42/Mcfe $1.64/Mcfe $1.53/Mcfe $2.44/Mcfe $1.99/Mcfe $1.49/Mcfe $1.94/Mcfe $2.92/Mcfe $1.85/Mcfe • Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1. • Source: Scotia Waterous

  14. Production Valuations 2Q 2005 – 1Q 2006 U.S. A&D Market Update $8,045 Mcfe/d $11,052 Mcfe/d $13,230 Mcfe/d $10,929 Mcfe/d $9,501 Mcfe/d $9,228 Mcfe/d $4,573 Mcfe/d $7,132 Mcfe/d $5,923 Mcfe/d • Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1. • Source: Scotia Waterous

  15. Selling Earlier in the Cycle – Overview U.S. A&D Market Update • In response to buyers’ eagerness to acquire assets with significant “running room,” sellers have started bringing their assets to market much earlier. Selling within the Asset Life Cycle Production/Value Sell or Grow Decision Point 1-2 Years Ago DevelopmentPlan PotentialDownside Sell or Grow Decision Point Today 0% 30% 50% 70% 100% % of Asset Developed Source: Scotia Waterous

  16. Kerr-McGee Case Study

  17. Summary Kerr-McGee Case Study • The marketing process (October 2005) for the Kerr-McGee Asset Divestiture Program brought in a number of aggressive buyers willing to pay substantial value for unexploited upside • Offering characteristics • ~ 7,345 boe/d (~ 56% oil) • ~ 40,800 Mboe (~ 49% oil) • Bidder profile • Interest from a wide variety of domestic producers including mid-caps, small-caps, pipeline, privates, private equity, and international firms • Transaction parameters(1) • Approximate overall sales price $400MM • $52,553/boe/d • $9.46/boe (1) Reserve and production figures based on Kerr-McGee internal estimates

  18. Offering Highlights Kerr-McGee Case Study • The Kerr-McGee divestiture presented an opportunity to acquire 5 unique packages including Permian Basin, Mid-Continent, South Texas, Rockies, and the Gulf Coast.

  19. Participation Profile – Overall Offering Kerr-McGee Case Study Scotia Waterous generated significant interest in the offering, receiving over 120 CAs from a mix of companies including, pipelines, internationals, and Canadian trusts CAs by Size Category Overview of Process 1,018 90 Bidders - New Entrants vs. Existing Producers Bidders - Public vs. Private Source: Scotia Waterous

  20. Asset Overview - Permian Area Kerr-McGee Case Study • Kerr-McGee’s West Texas assets contain legacy Permian Basin fields with classic long life waterfloods with potential for CO2 tertiary floods in the future Permian Area Overview • 1Q 2005 net sales of 809 BOE/day • 1Q 2005 cash flow of $2 MM • Located in Andrews, Howard, and Cochran Counties, Texas • Legacy West Texas production • San Andres waterfloods in Levelland and Slaughter Fields • Queen waterfloods in McFarland Field • Devonian production in Hutex Field • Wolfcamp production in Nolley Field • Upside potential: • Optimization of waterflood operations • Conversion of waterflood to WAG CO2 floods in San Andres waterflood units • Installation of surfactant flood in Nolley

  21. Asset Overview - Mid-Continent Area Kerr-McGee Case Study • Kerr-McGee’s Mid-Continent assets in Anadarko Basin contain three long-life waterflood units with predictable and stable production decline rates. Mid-Continent Area Overview • 1Q 2005 net sales of 615 BOE/day • All properties Kerr-McGee operated • 1Q 2005 cash flow of $1.5 MM • Located in Canadian, Woods, and Grady Counties, Oklahoma • Properties include: • Oakdale Field – Cottage Grove sand waterflood • Calumet Field – Redfork sand waterflood • Rush Springs SW – Medrano sand waterflood • Upside potential: • Improved recovery factors in waterfloods • Expansion of waterflood areas

  22. Permian & Anadarko Basins Transaction Parameters Kerr-McGee Case Study • In October 2005, Encore Acquisition Company announced the acquisition of Permian Basin and Anadarko Basin assets for $104 MM • Combined TP reserves of 6.2 MMboe(1) • Cash Flow(2) • 2005A/F: 7.3 (x) • Production(1) • $80,000/boe/d • TP Unit Value(1) • $16.77/boe (1) Based on EAC press release(2) Based on Kerr-McGee internal estimates

  23. Asset Overview - South Texas Kerr-McGee Case Study • Kerr-McGee’s South Texas Properties make up the majority of the production and value of the Offering South Texas Overview • Estimated net sales of 10 MMcfe/day(1) • 33% of Offering production • Estimated TP reserves of 88 Bcfe (75% gas)(1) • 1Q 2005 cash flow of $6.5 MM • Located in Hidalgo, Kleberg, Webb and Starr Counties, Texas • All Kerr-McGee operated properties • Complex, highly faulted structural and stratigraphic traps • Rincon – Frio and Vicksburg production • TCB – Frio and Vicksburg production • San Carlos - Frio production • Vaquillas Ranch – Lobo production • Multiple drilling and recompletion locations identified Notes: 1. Based on Houston Exploration Company press release

  24. South Texas Transaction Parameters Kerr-McGee Case Study • Houston Exploration Company (THX) announced the acquisition of South Texas assets for $163MM • Cash Flow(1) • 2005A/F: 5.3 (x) • Production(2) • $16,270/Mcfe/d • TP Unit Value(2) • $1.85/Mcfe (1) Based on Kerr-McGee internal estimates(2) Based on THX press release

  25. Conclusions Global A&D Trends • Scotia Waterous was pleased to have had the opportunity to present its thoughts on the national and global acquisition and divestiture market. • Supply is being driven by sellers believing they can achieve high valuations as well as portfolio clean-ups • Majors are/will still be selling assets (e.g. Chevron, ConocoPhillips) • Corporate consolidates will continue and lead to non-core asset sales (e.g. Petrohawk) • Privates and Private equity backed companies will continue to turn their assets • Demand is being driven by well financed buyers that lack organic growth, as well as an abundance of cash in the market place • Many buyers stock prices are high providing an attractive currency to use in acquisitions • Private equity looking to invest in the upstream is abundant • New money is looking to do invest in the upstream industry • Record oil prices, along with an aggressive long term outlook for gas prices, along with record available private equity, along with limited supply in the industry, will continue to lead to record prices being paid for assets/companies??? • International companies (e.g. Canadian Royalty Trusts, Asians) are increasingly taking a more active interest in U.S. assets/companies

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