EOG Package To Further Test Market By Year-End

Appalachia’s prized Marcellus shale play may take on yet more shine as offshore producers and investors balk at what the Obama administration’s new rules for Gulf of Mexico E&P may be.

One executive of a privately held, onshore-focused, unconventional-resource E&P says the politically unstable, and potentially more costly, Gulf investment environment will push onshore U.S. property values upward.

“I think anyone who is involved in the Gulf, especially if the government removes the liability cap…there may be midsize independents that might say ‘Maybe we will continue to play in the Gulf, but let’s look harder onshore and see what’s available.’ I think we’re seeing that right now,” he says.

The Marcellus and the liquids-rich Eagle Ford in South Texas have been attracting the most brow-raising deal-making this year, in addition to continuing asset shifts in the Haynesville, activity in the Bakken/Three Forks play, and cease-less transactions in the Permian.

Last week, the price for Marcellus grew further, with India’s Reliance Industries Ltd. paying $327 million for Avista Capital Partners’ 52,200 net acres of leasehold in Pennsylvania and $65 million for 20% of Carrizo Oil & Gas Inc.’s other 52,200 net acres in the total 104,400-net-acre Avista/Carrizo joint venture. The sale represents Avista’s exit from the Pennsylvania acreage but it continues a co-shareholding with Carrizo in West Virginia and New York acreage prospective for Marcellus.

Earlier this year, Reliance paid $1.7 billion to JV with Atlas Energy Inc. in the Marcellus and $1.3 billion to JV with Pioneer Natural Resources Co. in the Eagle Ford.

The Marcellus deal with Avista represents some $6,300 an acre for Marcellus.

Speculation is high that more private-equity-funded Marcellus-focused E&Ps will be grabbed up since Shell Oil Co. paid $4.7 billion in cash in May for East Resources Inc.’s 1 million net acres (650,000 of these are over Marcellus), making 60 million cubic feet equivalent per day. East had received private-equity funding from Kohlberg Kravis Roberts only a year earlier.

A leading Marcellus player says he could see that coming: “There were so many sales and joint ventures preceding the East sale, so it was clear there was quite an appetite, and East was able to sell for a future value at a price everyone was happy with.”

Another test of the price players are willing to pay for Marcellus will come by year-end with bids for EOG Resources Inc.’s Appalachian package. The producer is offering 180,000 acres of shale-gas acreage there and in the Haynesville, and the liquids-rich Eagle Ford.

Mark Papa, EOG chairman and chief executive, says, “We considered a joint venture (in) this acreage, but decided on an outright sale because it’s cleaner and less complicated. This acreage package is larger than we contemplated three months ago. We spent about $1.7 billion over the last few years accumulating first-mover, horizontal, shale acreage, and frankly, we have more good acreage now than we can say grace over, given our manpower and capital-structure plans.

“So we’re going to monetize a bit of this acreage.”

EOG’s divestments there and in Canadian shallow, conventional gas properties are towards retaining a net debt-to-cap ratio of 25% or less through 2012.

More Marcellus acreage on the market is privately listed. Asset marketers expect deal-making in the shale to continue to post headline-making numbers.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com