In contrast to the deepwater Gulf, the majority of shelf-asset buyers are based in the U.S., but a few Asian companies have entered the shallow-water area through corporate acquisitions and lease sales.

T?he Gulf of Mexico is attracting foreign investment at a record pace. Long recognized as a world-class oil- and gas-producing province, the Gulf has recently experienced significant investment from non-U.S.-based energy companies. Both in the deepwater regions of the basin and in shallow water, foreign companies are increasingly finding the Gulf of Mexico an attractive place.


In the deepwater region in particular, international buyers have dominated the acquisition landscape for assets and projects.


Since the beginning of 2005, a period in which almost $18 billion worth of deepwater assets has traded hands, transactions involving buyers headquartered outside of the U.S. represent approximately 98% of the value and approximately 82% of the deals. In contrast, for deepwater transactions announced from 2001 to 2005, non-U.S. buyers represented only 35% of the value and 27% of the deals.


Prior to 2005, the deepwater Gulf was much less mature and transaction disclosure was not nearly as good as it is now. Infrastructure, technology and commodity prices have since moved the region forward significantly from just a few years ago, and projects have become substantially larger. The result is a considerable need for development capital and a willingness of deepwater operators to share their risk and their upside potential, creating the ultimate breeding ground for partnerships.


The Gulf’s deep water, more so than the shallow waters of the shelf, attracts interest from foreign energy investors who are looking to diversify their technical, operational, commercial and political risk.


High-working-interest operators have been willing to sell down their interests in these projects or leases, and foreign investors have been just as willing to gain access to the massive reserve potential and sophisticated deepwater operators’ expertise.


Many international companies that have been skillful deepwater operators in other areas of the world have made acquisitions in the Gulf to establish significant operated positions in the basin, joining the ranks of the major oil companies and certain domestic large-cap independents.


European companies such as BP Plc, ENI, Repsol, StatoilHydro and Total SA have been the most aggressive aggregators in the deep water. Asian companies such as Itochu Corp., Marubeni, Mitsubishi, Nippon and Sojitz have entered more recently.


In fact, Asian companies did not play a meaningful role in the deepwater Gulf prior to 2006, the year when Marubeni paid $1.3 billion to Pioneer Natural Resources for deepwater assets. Nippon and Mitsubishi then followed Marubeni with their joint purchase of a 23.2% interest in the K2 deepwater unit from Anadarko Petroleum Corp. in early 2007.


From a lease-ownership perspective, the deepwater Gulf is largely dominated by super-majors, majors and international integrated oil companies with the technological and financial capacity for successful execution of large-scale development. The top 20 operators hold more than 80% of the total deepwater leases and acres; approximately half are headquartered outside the U.S.

New entrants
In contrast to the deepwater Gulf, the majority of buyers of shelf assets are headquartered within the U.S., although that trend appears to be changing as Asian companies in particular are actively looking to establish positions.


Most recently, the South Korean joint venture of Korea National Oil Corp. (KNoc) and Samsung Corp. teamed to acquire New Orleans-based Taylor Energy Co.’s assets in early 2008. Tokyo-based Itochu acquired Range Resource Corp.’s shelf assets for $155 million in early 2007.


Since the beginning of 2005, non-U.S. buyers represent approximately 25% of the value and approximately 26% of the deals on the shelf. Prior to 2005, foreign buyers in the shelf were virtually nonexistent.


As opposed to acquisition opportunities in the deep water, shelf offerings often come with operational control, which has historically eliminated most Asian companies as buyers due to their preference to invest on a nonoperated basis. More often, however, Asian companies are pursuing operated acquisition opportunities on the shelf, in part because many have already established a position and have been “in training” as nonoperators

Favorable fiscal terms, well-defined legal precedent, a favorable political climate and a predictable tax regime help draw non-U.S. oil and gas companies to the Gulf.

Foreign companies are also participating more frequently in auctions of Gulf properties. This is primarily due to the advent of the virtual data room, allowing evaluation teams to access data-room materials from almost anywhere in the world.


When they bid, Asian companies make it difficult for U.S. producers to compete in auction processes due to their lower cost of capital, stronger currency and, in some cases, government-subsidized procurement plans.


In comparison with the deepwater Gulf, the shelf is still largely dominated by U.S. operators. While super-majors and majors play a significant role on the shelf, it is typically the smaller, domestic public independents that make headlines in the acquisition and divestiture market in the shelf.


This group includes Bois d’Arc Energy, which announced its pending merger with Stone Energy Corp. in April, Energy XXI, Energy Partners Ltd., Mariner Energy Inc., McMoRan Exploration and W&T Offshore.


In addition, a few private-equity-backed companies plan to be consolidators on the Gulf shelf, which is largely a fragmented basin beyond the top 15 or 20 operators. A good example is Houston-based Dynamic Offshore Resources LLC, formed in January 2008 with $450 million in funding from Riverstone Holdings and $50 million from a team led by chief executive and co-founder Matt McCarroll, previously president of Maritech Resources Inc. In March, Dynamic teamed up with affiliate, Moreno Group Holdings LLC, to purchase a combined 75% interest in SPN Resources LLC for $165 million.

Investment rationale
The Gulf of Mexico offers seemingly unlimited oil and gas exploration and exploitation potential and high rates of return. Numerous plays remain to be exploited. While the deepwater Gulf offers an expanding frontier of plays driven by technological innovation and infrastructure development, the shelf continues to produce from mature fields, although the advent of new plays and new technology is creating additional opportunities there.

In contrast to the deepwater Gulf, the majority of shelf-asset buyers are based in the U.S., but a few Asian companies have entered the shallow-water area through corporate acquisitions and lease sales.

Positive drivers affecting global demand for establishing a position or expanding in the basin include high-impact drilling opportunities, extensive and expanding pipeline infrastructure, an open, transparent M&A landscape and easy access to historical data. Concerns for international investors include hurricanes, high operating costs, a competitive leasing and exploration environment, steep production declines, and costly, time-consuming exploration.


Fiscal terms in the Gulf are considered among the most stable and attractive in the world. Laws are well-defined and legal precedent is well documented to protect foreign and local investors alike. And the political climate is extremely stable.


From an operational perspective, access to goods and services and proximity to the largest hydrocarbon consumption market in the world make the Gulf an attractive place.


Global energy companies view the Gulf as a sophisticated oil and gas region from which they have the ability to transfer technology, skillsets and operational knowledge to other parts of the world. Conversely, offshore operators have the opportunity to apply capabilities attained from operating in other parts of the world to the Gulf. North America is broadly considered to be oil and gas opportunity-rich and the Gulf is often a starting point for non-North American firms looking to set up a “beachhead” onshore the U.S. and Canada.

Limited opportunity
To whet the already significant appetite for oil and gas resources in this area, the supply of good investment opportunities is relatively limited due to a number of factors, most notable being constrained rig availability.


Industry-wide demand for deepwater rigs is extremely high. According to industry data, full utilization is expected through at least 2010 and the 42 deepwater rigs under construction for delivery through 2009 are all under contract. With dayrates for deepwater rigs currently exceeding $500,000 per day—up 10% from just a year ago—the concept of 10-year contracts is now being discussed.


In addition, the top deepwater producers with rig capacity already have large portfolios to develop with significant lease expirations upcoming. With efforts focused on drilling the expiring leases, limited rig availability remains for work on new leases.
On the demand side, rising commodity prices, improving technological capabilities and developing infrastructure are driving demand for deepwater leases to all-time highs.


The Central Gulf lease sale in October 2007 was the most competitive in 24 years. It provided evidence that the deepwater Gulf is now attracting the highest bids per acre in the world, overtaking Brazil and Africa.


A large demand overhang for deepwater Gulf leases of nearly $5 billion exists as a result of the 2007 and 2008 sales. The bidders in these lease sales can be largely characterized as the current top producers in the region, although several hopeful new entrants—foreign companies—were also very active bidders.


As the region continues to mature, and if the economic and political fundamentals continue to support foreign investment in the U.S., the Gulf will continue to evolve into the most international energy province in the world.

Related Document: GOM Shelf Transactions (PDF)

Lance Dardis is an associate director based in Houston with M&A advisory firm Scotia Waterous. Since January 2007, Scotia Waterous has completed Gulf of Mexico transactions involving six different Asian companies.