It's been whipped by hurricanes, squeezed by rising insurance costs and nostalgic for the days of cheap dayrates, which were only a couple of years ago. Yet, the shallow Gulf of Mexico remains unbeaten. It does tend to offer smaller finds than long ago, but higher oil and gas futures have shined that up. Many E&P companies are exiting the Gulf, yet for every seller, there has been a buyer, and they're paying up-an average of $2.06 per proved thousand cubic feet equivalent (Mcfe) in third-quarter 2005-according to investment banker Scotia Waterous. The average price is higher than that of any of the eight other U.S. regions the firm tracks. Acquisitions announced in just the past few weeks are even pricier. W&T Offshore Inc. will pay $3.59 per proved Mcfe for Kerr-McGee Corp.'s shelf properties. Cal Dive International Inc. has offered $5 per proved Mcfe for Remington Oil and Gas Corp. (For more on these deals, see "Company Briefs" in this issue.) Northstar Interests Inc. has bid $52.5 million for some 26 billion cubic feet equivalent (Bcfe) of proved for Petrohawk Energy Corp.'s Gulf properties. Total E&P USA Inc. swapped net production of 107 million cubic feet equivalent per day in South Texas for Shell E&P's 17% nonoperated interest in the deepwater Tahiti Field. They're bulls in this gas basin. "Recent M&A transactions in the Gulf of Mexico region have taken place at eye-opening prices as compared to public market values and historical comparable transactions," says Shannon Nome, E&P analyst with JPMorgan in Houston. Other recent deals include; Norsk Hydro ASA's purchase of Spinnaker Exploration Co., gaining 62 million barrels of oil equivalent (BOE) of proved reserves for $2.6 billion; Woodside Energy (USA) Inc.'s acquisition of Gryphon Exploration Co.'s 72 Bcfe of proved for $297 million; Mariner Energy Inc.'s acquisition of Forest Oil Corp.'s 344 Bcfe of proved for $1.2 billion; Statoil ASA's acquisition of EnCana Corp.'s 41 million BOE of proved for $2 billion; and Various buyers' purchase of 88 million BOE of proved from Devon Energy Corp. for $1.2 billion. There was also the 2005 roll-up of Comstock Resources Inc. and Bois d'Arc Resources Inc.'s joint Gulf assets into Bois d'Arc Energy Inc. in a deal valued at more than $1 billion and involving some 300 Bcfe of proved. Other active 2005 buyers include ATP Oil & Gas Corp., Energy Resource Technology Inc. (an E&P business of Cal Dive), Deep Gulf Energy LP, Capco Energy Inc., PetroQuest Energy Inc., Maritech Resources Inc. and Nippon Oil Exploration Ltd. In addition, Gulf assets, among others, are involved in Chevron Corp.'s purchase of Unocal Corp., ConocoPhillips' planned acquisition of Burlington Resources, and Rosetta Resources Inc.'s purchase of Calpine Corp.'s E&P assets. (More details on 2005 U.S. M&A activity is in "The U.S. Asset Portfolio" in this issue.) And, more Gulf divestments are under way-those of Pioneer Natural Resources and Houston Exploration. Gulf acquisition prices bode well for the take-out values of Gulf producers such as Energy Partners Ltd., Bois d'Arc Energy, ATP, McMoRan Exploration and Callon Petroleum, says A.G. Edwards E&P analyst Mike Scialla. Other active Gulf producers include Stone Energy Corp., Newfield Exploration and Pogo Producing. Roger Read, oil-service analyst, and John White, E&P analyst, both with Natexis Bleichroeder Inc., estimate the typical Gulf shallow-water prospect generates an after-tax return of 122%. "We believe the shallow-water Gulf of Mexico remains an economically attractive market for E&P and energy-service companies." Their estimate is based on a gas-price forecast of $7.88 per Mcf in 2006 and $8.50 in 2007, and on current jackup dayrates. If oil-service costs continue to rise, they expect gas prices will have to exceed $6.50 per Mcf to produce after-tax returns of 15% or more on the typical shallow-Gulf well. Today, gas prices need to be some $5 per Mcf, "indicating why activity has been robust and why service-cost escalation has had no impact on activity thus far." With current gas prices, "the Gulf shallow-water market should remain robust for all of 2006," they conclude.
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