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Analysis - Deals signal US Gulf recovery

14 Sep 2012, 6.21 pm GMT

Analysis - Deals signal US Gulf recovery

London, 14 September (Argus) — Most US upstream independents are focusing on shifting investment to boost onshore liquids output over natural gas production organically, but Plains Exploration and Production is taking on a high-risk asset acquisition in the US Gulf of Mexico.

Plains is paying a combined $6.1bn for assets from BP and Shell that will make it one of the largest independent oil producers in the US Gulf. Plains sought to sell much of its Gulf of Mexico business two years ago in the aftermath of BP's Macondo oil spill in 2010. But Plains has now turned buyer, after the spill depressed asset values in the region and forced it to rethink its divestment plans.

The bigger of its two acquisitions, a $5.55bn transaction with BP, is a sign of recovering prospects in the Gulf and a result of the 2010 spill. Plains, which had tried to reduce its exposure to increased risks, liabilities and costs in the Gulf, is looking to the region to drive its growth in output and cash flow.

BP is selling its interests in five operated mature fields that account for more than 20pc of its Gulf output. The sales fall under a $38bn divestment programme, launched mainly to pay for spill damages. The deal will leave BP $5bn short of its target. “Without the corporate needs of the seller, these assets would not have been for sale,” Plains chief executive James Flores says.

Flores saw the opportunity to buy these properties as too good to resist, despite past concerns about costs and regulatory changes in the Gulf. The purchases will immediately increase Plains' output by 68pc — adding 67,000 b/d of oil equivalent (boe/d), 87pc of which is crude that is selling at a $17/bl premium to US benchmark WTI — and provide deepwater production platforms with capacity for growth.

Plains is getting full ownership of three fields that feed the Marlin platform in the Gulf, as well as the Holstein and Horn River fields, which have their own platforms. The company expects the Gulf to make up two-thirds of its operations and drive its growth in output to 300,000 boe/d from less than 99,000 boe/d in this year's second quarter, as it redevelops the properties and ties in new fields to their platforms over a period of decades.

“This is the same hub-and-spoke strategy that the majors have deployed and enjoyed out in the Gulf of Mexico,” Flores says. “It just did not take 20 years to build it. We were able to get it in one transaction, which gives us a tremendous advantage over other independents that would want to try to duplicate this strategy going forward.”

That Plains would make such a gamble — agreeing to deals that exceed its market value by about 30pc and taking on $7bn in debt — shows how far the industry has come since deepwater drilling was halted after the BP spill. Deepwater drilling resumed last year.

Flores sought to sell as much as $2bn in deepwater assets in 2010 because the company's share price did not reflect the value of its Gulf properties, but he now sees the region as the lynchpin of Plains' growth strategy. The Gulf outlook was so bleak in 2010 that the company could not sell its assets at an acceptable price. The firm instead sold a 20pc stake in its offshore unit for $450mn and interests in shallow-water Gulf projects for $75mn plus a share of partner McMoRan Exploration.

Opportunity knocks
Flores calls the transactions the best acquisition opportunity in the past three years, one that is unlikely to be available again in the Gulf unless crude prices drop to $50/bl. But the company's share price fell by 11pc on the day the deals were announced, as investors reacted to the high price of the deal.

Plains is not alone in its willingness to bet on the Gulf. Drilling in shallow waters has slowed sharply, but deepwater exploration is exceeding pre-spill levels. The BP and Shell assets give Plains the infrastructure to tie in decades worth of development wells, without the long lead times of exploring new areas. “This has very long life. We have a fully engineered plan for the next eight years,” Flores says.

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