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Global oil companies are snapping up smaller exploration and production companies–you should be doing the same

posted on October 21, 2011 at 8:32 am
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In June Australia’s BHP Billiton (BHP) bought U.S. tight shale oil and gas producer Petrohawk. In July China’s CNOOC (833.HK) bought Canadian oil sands producer Opti Canada. This week Norway’s Statoil (STO in New York or STL.NO in Oslo) bid to acquire U.S. oil shale producer Brigham Exploration (BEXP).

See a pattern here?

Global oil companies and oil consuming countries are looking past the current soft demand for oil created by today’s global economic slowdown and today’s lower oil prices. They see a future of rising demand and rising energy prices—and of limited opportunities for adding to reserves and production. They also see an opportunity created by today’s lower oil prices and oil producer share prices to buy reserves and exploration opportunities. And these global oil producers and oil consuming countries are moving aggressively to seize that opportunity.

Oh, and let’s not forget that money is cheap right now (if you’re a global oil producer, that is). Many of these offers are all cash deals that are buying shares of the acquired companies at depressed prices.

My question to you is What are you doing about seizing this opportunity for your portfolio? Let me give you a few suggestions in this post.

Statoil, Norway’s state-controlled oil company is an example of the larger story in microcosm. For decades Statoil has been a leading producer of oil and natural gas from the waters of the Norwegian Continental Shelf. But like the neighboring North Sea fields, these Norwegian fields have shown declining production as they’ve aged. In its most recent capital plan Statoil announced a combination of spending on enhanced oil recovery in older fields and new exploration and production in the area that are projected to stabilize the decline in production from the Norwegian Continental Shelf and actually lead to a slight uptick in production to 1.4 million barrels of oil equivalent in 2020 from 1.38 million barrels in 2010.

But stabilizing production in its older fields is just part of Statoil’s plan. It has also been spending big time to buy into areas that promise rising future production. That has included buying into joint ventures in unconventional resources in the U.S. Marcellus natural gas shale and Eagle Ford gas and liquids plays. And most recently with the purchase of Brigham Exploration, a leaseholder on 375,000 acres of the Bakken and Three Fords tight oil formations in North Dakota and Montana. Current production from that area for Brigham now amounts to 21,000 barrels of oil equivalent a day but oil industry analysts say Statoil will easily be able to increase production to 60,000 barrels a day over the next five years. Statoil has offered to buy Bingham Exploration in an all cash offer for $36.50 a share.

That’s not much higher than the stock’s recent price of a premium over the stock’s recent price, but then Brigham is trading near its 52-week high of $37.87.

But what’s of most interest to investors—unless you happen to already own Brigham—is the big jump in the price per acre that Statoil is paying for Brigham Exploration’s Bakken acreage. The deal price works out to about $12,000 for each Bakken acre that Brigham has under lease. That’s the most ever paid in a major Bakken deal, according to Bloomberg, and at least 50% more than Occidental Petroleum (OXY) and Hess (HES) paid for their Bakken acreage in the last year.

I’m sure that seems odd to investors who have a short-term view of the financial markets and the economy. Why pay a record price for reserves and potential reserves when oil is selling for just $86 a barrel for West Texas Intermediate (the U.S. benchmark) and just $109 a barrel for Brent (the European benchmark.) We’re a long way away from the heady days when oil sold for $140 a barrel. And this is before Libya gets back into production adding more oil to global supply at a time when global demand is soft.

But oil companies aren’t short-term investors and from a long-term perspective the picture looks very different. The costs of producing oil are rising—whether you’re a Statoil planning to spend more on enhanced recovery techniques or a Petrobras (PBR) trying to figure out how to get oil from salt formations deep, deep under the South Atlantic. According to Bloomberg, ExxonMobil’s (XOM) costs of finding and developing oil have climbed to $14.21 a barrel, a 10 times increase in 10 years.

Those rising costs justify spending more money to secure access to future reserves, especially if those reserves are in politically low-risk countries and come with relatively predictable production costs. Oil companies know what it costs to produce oil from the Bakken shales and to get it to market. Petrobras has only a guess on production costs and infrastructure needs in the South Atlantic. ExxonMobil (XOM) has only a guess on costs to produce oil and gas from the frozen Russian Arctic.

But there’s something else driving the price of Bakken and other potential production plays. Looking at the world, oil companies see a scarcity of new promising areas for exploration and production. In their estimation—especially when you factor in potential reserves that are off limits because they’re controlled by a national oil company in Saudi Arabia or Mexico or Venezuela—there just aren’t a lot of places to look for oil if you need to replace, let alone expand, reserves.

And that has produced a kind of global bidding war among oil companies eager to secure potential future resources.

As an investor I think the strategy with the most potential profit in it is to think long-term like a global oil company and buy what you think might be on their list of targets.

In the United States I think that means unconventional producers such as Pioneer Natural Resources (PXD) in the liquids-rich Eagle Ford shale formation. (That’s the same formation where Petrohawk did business.) And other plays in the Bakken shale that operate next to Brigham Exploration.

Two stocks that I’d bring to your attention are Oasis Petroleum (OAS) and Whiting Petroleum (WLL). Oasis holds leases on about 303,000 acres in the 200,000 square-mile formation. Whiting has leases on 579,000 acres, mostly in the southern part of the basin. To date most production has come from western North Dakota. The U.S. Geological Survey estimated in 2008 that the Bakken formation, the largest contiguous oil deposit in the United States, could contain 4.3 billion barrels of recoverable oil.

Outside the United States I’d be looking at Talisman Energy (TLM.US in New York or TLM.CN in Toronto) and Tullow Oil (TUWOY in New York and TLW.LN) in London.


Here the game is big new offshore discoveries that might be tempting to either the international majors or to national oil companies looking to lock up future sources of supply. Talisman holds unconventional natural gas and oil leases in the U.S. Eagle Ford and Marcellus plays, but the big attraction here is the company’s 14.6 million undeveloped acre position in Southeast Asia. In 2011 Talisman has increased production in Indonesia and Vietnam and started new development projects in those two countries and in Papua New Guinea. Talisman projects that production in Southeast Asia will grow at an average annual rate of 8% to 10% through 2015. Tullow’s Jubilee field of Ghana is a major extension of the exploration horizon in western Africa—it’s not just about Nigeria anymore.

As acquisitions both Talisman and Tullow would be bigger mouthfuls than an Oasis or a Whiting but with cash so cheap, oil prices down, and oil companies casting worried looks at the future, I don’t think they’re outside the current deal envelope.

And at the worst you’ll be buying stock in oil companies that are themselves expanding production and that can expect the future price of oil to be higher than it is in today’s soft global economy.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Brigham Exploration and Oasis Petroleum as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/


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  • oa9200 on 21 October 2011

    what is your take on dollar direction?? if UUP going down, $WTIC should go up?? Vice versa..

  • jockocampbell on 21 October 2011

    Hi Jim,

    I like the smaller Canadian oil companies which are deploying fracking technology to recover oil from depleted conventional fields. In this space I hold tve and arn.

    I also like cpg although it is larger, however sinopec recently bought DAY so they seem open to buying a range of company sizes.

    Canadian oil companies are also currently suffering for the 20% – 25% discount they are receiving for WTI compared to the rest of the world at BRENT.

    Hopefully the US will rationalized its distribution system or Canada will build some west coast oil ports.


  • BrHowie on 22 October 2011

    One point of clarification. Statoil’s $36.50 per share offer for BEXP was about a 20% premium over the stocks price when the deal was announced. Not too shabby for BEXP shareholders!

  • java12jack on 22 October 2011


    What are your thoughts on ECA and CVE?

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