Find out who these players are and why they’re destined to pump out millions of barrels of oil in the future…
Location. Location. Location.
That’s been the mantra in many industries since forever, from restaurants to retail stores to professional sports franchises (that goes for you, Phoenix/Glendale Coyotes).
Pick an area with great potential and a proven track record to set up shop, and you have potential to hit the mother lode.
Failure to get the location right and you could end up digging a massive hole in your wallet.
The same goes for oil and gas producers.
While a great deal of due diligence and geographic research is undertaken to try and pinpoint what location will yield the best ROI, identifying a gusher is never guaranteed.
Even in the most prolific regions of oil country surrounded by high-producing wells, companies can still come up empty-handed.
Therefore, many try to up their odds of success by amassing as much potentially lucrative properties as they can before drilling is even considered.
For the most part, most of the juicy acreage that exists has already been bought up. So naturally, companies resort to buying assets from one another.
Consulting firm BDO USA LLP reported that as of Q3 2013, there’s been $34 billion worth of mergers & acquisitions (M&A) in the energy industry since the start of the year.
This was well off the blistering pace that we saw in 2012, which tallied some $83 billion according to consultancy PLS Inc.
But next year there’s a good chance that number will go up significantly.
In its annual survey of 100 US oil and gas CFOs, 71% of executives are more confident about their companies’ ability to obtain financing in 2014 as opposed to 51% who felt the same sentiment last year.
Furthermore, 43% of those surveyed expect an increase in M&A activities in the coming year.
“Oil and gas executives can feel relatively secure in their finances this coming year as the U.S. energy industry continues to gain momentum,” said Charles Dewhurst, partner and leader of the Natural Resources practice at BDO. “Not only is our economy improving, but with demand exploding worldwide, new doors are opening for increased revenue. We are seeing significant foreign investments flowing into U.S. assets, as well as a growing need for U.S. oil and gas globally—and the price differential is quite favorable for us.”
As you can see, there are now even more a bullish incentives to develop domestic assets in the year ahead
And a big part of that focus will be in shale plays.
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According to PricewaterhouseCoopers LLP, shale-related acquisitions accounted for over a third of all energy deals in Q3 alone.
One of the most notable purchases from the third quarter was the 161,000 net acres allocated by Oasis Petroleum (NYSE:OAS) in the Bakken shale.
The deal was worth $1.5 billion and it helped increase the Company’s acreage by 50%, production by 28%, and future drilling locations by 42%.
To emphasize location once again, the newly acquired land is adjacent to Oasis’ existing properties in the highly productive Williston Basin region of the Bakken.
After the initial run up of its stock following the announcement, the stock tumbled by over 20%, thus making it a solid play trading at about 19 times earnings.
Another Company that’s banking on a big land grab is Denver-based QEP Resources (NYSE:QEP).
Just last week, QEP announced it will buy properties in the Permian Basin worth an estimated $950 million.
Upon closing of the deal at the end of January, the transaction will include 26,519 net acres in Martin and Andrews counties in the Midland sub-basin.
These producing assets comprise of 264 vertical wells that are currently generating 6,700 boed, about 68% of which is crude oil.
QEP reports an estimated 47 million boe in proven reserves with the potential to have up to 775 horizontal drilling locations.
That’s only a small preview of what can be expected as 2013 comes to a close.
On November 20th, the US House of Representatives passed a bill to fast track the oil and gas permitting process, paying specific attention to shale projects.
The bill stipulates that a decision must be made on a permit application within 30 days of submission. An additional review period of up to 30 days by the Secretary of the Interior may be implemented, after which the permit will be deemed approved.
The bill also requires the Secretary to conduct sales of new leases in areas “considered to have the most potential for oil shale development,” and that there shall be no less than five sales of leases by January 1, 2016.
With companies keen to jockey for position while there’s still valuable land available, their investments now will no doubt pay off down the road.
In this current energy boom, location definitely matters.
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