a&d market update presented to moga adrian goodisman managing director may 18, 2006
TRANSCRIPT
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
Scotia Waterous Introduction
4
• 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
Summary Scotia Waterous Introduction
5
Scotia Waterous Worldwide Activity
• 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.
Global A&D Trends
6
Recent U.S. Advisory Mandates
May 2005
Exclusive Financial Advisor
Advised on divestiture to
Pecos Production Company
$200,500,000
for
June 2005
Exclusive Financial Advisor
Advised on corporate sale toEverlast Energy LLC
Undisclosedfor
ConstellationEnergy
October 2005
Exclusive Financial Advisor
Advised on South Texasdivestiture to
Kerr-McGee Corporation
$163,000,000
The Houston Exploration Company
October 2005
Exclusive Financial Advisor
Advised on divestiture to
Permian and Mid-Continent
Kerr-McGee Corporation
$104,000,000
Encore Acquisition Company
Scotia Waterous Introduction
J u ly 2 0 0 5
Tra n sa ctio n A d v iso r
A d v ised o n d iv estitu re toE x x o n M o b il C o rp o ra tio n
$ 2 1 5 ,0 0 0 ,0 0 0
fo r
M a y 2 0 0 5
Tra n sa ctio n A d v iso r
A d v ised o n d iv estitu re to
E x x o n M o b il C o rp o ra tio n
$ 9 7 2 ,0 0 0 ,0 0 0
fo r
• Since January 2005, Scotia Waterous has advised on approximately $4.0 billion in oil and gas assets in the United States.
C u rren t
E x clu siv e F in a n cia l A d v iso r
A d v isin g o n W illisto n B a sina sset d iv estitu re
3 ,5 0 0 b o e /d
CamWest Par t ner s I I , LLC
J a n u a ry 2 0 0 6
E x clu siv e F in a n c ia l A d v iso r
A d v ised o n d iv estitu re o f E a st Tex a s & M ississip p i a sse ts to
To ta l E & P U S A , In c .
$ 3 0 0 ,0 0 0 ,0 0 0
F o r
C u rren t
E x clu siv e F in a n cia l A d v iso r
A d v isin g o n d iv estitu reo f P erm ia n a ssets
3 1 5 b o e /d
F eb ru a ry 2 0 0 6
E x clu siv e F in a n cia l A d v iso r
A d v ised o n d iv estitu re o fP erm ia n B a sin a ssets
8 5 0 b o e /d
C h i E n erg y, In c .
F eb ru a ry 2 0 0 6
E x clu siv e F in a n cia l A d v iso r
A d v ised o n sw a p p in g S o u th Tex a s a sse tsf
o r G u lf o f M ex ico d eep w a ter a sse ts fro m
To ta l E & P U S A , In c .
11 7 M M cfe /d
S h ell E x p lo ra tio n & P ro d u ctio n
D ecem b er 2 0 0 5
E x clu siv e F in a n c ia l A d v iso r
A d v ised o n R o ck iesd iv estitu re to
K err-M cG ee C o rp o ra tio n
3 ,1 0 0 b o e /d
H ilco rp E n erg y C o m p a n y
C u rren t
E x clu siv e F in a n cia l A d v iso r
A d v isin g o n A rk L a Texa sset d iv estitu re
1 ,2 0 0 b o e /d
M a y 2 00 6
E x clu siv e F in a n cia l A d v iso r
A d v ised o n co rp o ra te sa le to
C H 4 E n erg y, L L C
$ 8 2 ,0 0 0 ,0 0 0
F o r
A p ril 2 0 0 6
E x clu siv e F in a n c ia l A d v iso r
A d v ised o n d iv estitu re o fG u lf o f M ex ico S h e lf a sse ts
3 3 B cfe
U.S. A&D Market Update
8
Commodity Price and Capital
NYMEX Henry Hub1
NYMEX WTI
$3.00
$6.00
$9.00
$12.00
$15.00
$18.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Start of 4Q/05 Start of 1Q/05
Start of 2Q/06 Current Strip
Months Forward
NY
MEX
Hen
ry H
ub
N
atu
ral G
as (
$/M
MB
tu)
Current StripMay 8, 2006
$45.00
$55.00
$65.00
$75.00
$85.00
$95.00
1 3 5 7 9 11 13 15 17 19 21 23
NY
MEX
WTI
Cru
de O
il
($/b
bl)
Months Forward
Start of 4Q/05 Start of 1Q/05
Start of 2Q/06 Current Strip
Current StripMay 8, 2006
Excess Cash Flow 2005
44%
7%4%26%
19%
Op Costs
G&A
Int. Exp.Int. Exp.
CapexCapex
Excess CFExcess CF
Cash Flow Leverage
0.00x
1.00x
2.00x
3.00x
4.00x
5.00x
6.00x
7.00x
Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005
Net
Deb
t/EB
ITD
A (
x) Majors
Large Cap
Mid CapMid Cap
Small CapSmall Cap
Note: (1) Natural gas futures have been “smoothed” to mitigate the impact of seasonality.Source: Scotia Waterous, Bloomberg.
• Strong commodity prices, especially oil, have resulted in substantial cash flow, creating additional buying power for most E&P companies.
U.S. A&D Market Update
9
Cash Flow vs. Asset Supply
Cash Flow vs. Asset Supply
$0
$10
$20
$30
$40
$50
$60
1999 2000 2001 2002 2003 2004 2005
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
($ B
illion
s)
Average Yearly Spot
Cash Flow
Asset SupplyAsset Supply
NY
MEX
Hen
ry H
ub
($/M
MB
tu)
Note: (1) Cash flow figures represent public independents.Source: Scotia Waterous, Bloomberg.
• 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.
U.S. A&D Market Update
10
U.S. Quarterly Transaction Trends
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
$5,500
$6,000
$6,500
2Q
00
3Q
00
4Q
00
1Q
01
2Q
01
3Q
01
4Q
01
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
0
20
40
60
80
100
120
140
160
U.S. Asset Transactions 2000-2006
Transaction Value – Gas
Transaction Value – Oil
Transaction Value – Undisclosed
Transactions (#)
Tra
nsacti
on
Valu
e (
$M
M)
Tra
nsacti
on
s (
#)
U.S. A&D Market Update
Source: Scotia Waterous, J.S. Herold.
• 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.
2-year Quarterly Average ~$4,000MM
4-year Quarterly Average ~$1,500MM
11
Supply/Demand Imbalance – Buyer Profile
U.S. Market Segmentation by Asset Value
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Majors Large Caps Mid Caps Small Caps Pipelines Privates
Hunt Petr.MeritCelero
ApacheXTO
2002 2003 2004 2005 YTD 2006
(1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.
• 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.
Whiting
Tra
nsacti
on
s b
y C
om
pan
y C
ate
gory
as %
of
Tota
l Tra
nsacti
on
Valu
e
U.S. A&D Market Update
Chesapeake/UndisclosedMarubeni/Pioneer
W&T/Kerr-McGee
LCX Acq’nTXOK
Black StoneOxyStatoil
XTOApache
Burlington
12
Supply/Demand Imbalance – Seller Profile
U.S. Market Segmentation by Asset Value
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Majors Large Cap Mid Cap Small Cap Pipelines Privates
Tra
nsacti
on
s b
y C
om
pan
y C
ate
gory
as %
of
Tota
l Tra
nsacti
on
Valu
e
Anadarko
PioneerDevonEnCana
Kerr-McGee
(1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.
• 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.
ExxonMobilAmerada
TotalShell
ExxonMobilChevron
2002 2003 2004 2005 YTD 2006
Marubeni/PioneerW&T/Kerr-McGee
AnschutzCelero
Winwell
SG InterestsLLOG
CrownQuest
Chesapeake/Undisclosed
U.S. A&D Market Update
13
Proved Reserve Valuations 2Q 2005 – 1Q 2006
(1) Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1.Source: Scotia Waterous
$1.64/Mcfe
$2.44/Mcfe
$1.85/Mcfe
$1.94/Mcfe
$1.53/Mcfe
$1.49/Mcfe
$1.42/Mcfe
$2.92/Mcfe
$1.99/Mcfe
U.S. A&D Market Update
14
Production Valuations 2Q 2005 – 1Q 2006
(1) Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1.Source: Scotia Waterous
$13,230 Mcfe/d
$9,228 Mcfe/d
$10,929 Mcfe/d
$5,923 Mcfe/d$7,132 Mcfe/d
$11,052 Mcfe/d
$9,501 Mcfe/d
$8,045 Mcfe/d
$4,573 Mcfe/d
U.S. A&D Market Update
15
Selling Earlier in the Cycle – Overview
Selling within the Asset Life Cycle
0% 30% 50% 70% 100%
% of Asset Developed
Pro
du
cti
on
/Valu
e
DevelopmentPlan
PotentialDownsideSell or Grow
Decision PointToday
Sell or GrowDecision Point1-2 Years Ago
U.S. A&D Market Update
Source: Scotia Waterous
• In response to buyers’ eagerness to acquire assets with significant “running room,” sellers have started bringing their assets to market much earlier.
Kerr-McGee Case Study
17
Summary
• 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
Kerr-McGee Case Study
18
Offering Highlights
• The Kerr-McGee divestiture presented an opportunity to acquire 5 unique packages including Permian Basin, Mid-Continent, South Texas, Rockies, and the Gulf Coast.
Kerr-McGee Case Study
19
Participation Profile – Overall Offering
Overview of Process
Bidders - New Entrants vs. Existing Producers
CAs by Size Category
Bidders - Public vs. Private
Scotia Waterous generated significant interest in the offering, receiving over 120 CAs from a mix of companies including, pipelines, internationals, and Canadian trusts
0
60
120
180
240
300
Intro.Letters
IMs CAs Data RoomVisits
0
5
10
15
20
25
30
35
New Entrants Existing
0
4
8
12
Large-Cap Mid-Cap Small-Cap Pipeline Private Intl./ Other
0
5
10
15
20
25
30
35
40
Public Private
901,018
Source: Scotia Waterous
Kerr-McGee Case Study
20
Asset Overview - Permian Area
Permian Area Overview
• 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
• 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
Kerr-McGee Case Study
21
Asset Overview - Mid-Continent Area
Mid-Continent Area Overview
• Kerr-McGee’s Mid-Continent assets in Anadarko Basin contain three long-life waterflood units with predictable and stable production decline rates.
• 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
Kerr-McGee Case Study
22
Permian & Anadarko Basins Transaction Parameters
• 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
Kerr-McGee Case Study
23
Asset Overview - South Texas
South Texas Overview
• Kerr-McGee’s South Texas Properties make up the majority of the production and value of the Offering
• 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
Kerr-McGee Case Study
24
South Texas Transaction Parameters
• 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
Kerr-McGee Case Study
25
Conclusions
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
Global A&D Trends
26