April 2019, Vol. 246, No. 4

Offshore & Gulf of Mexico Report

Optimism Abounds for M&A in the Gulf of Mexico

By Jeremy Kennedy and Kelli Sims, Shearman & Sterling

A comeback is expected for M&A activity in the U.S. Gulf of Mexico. The combination of substantial inventory on the block, potential proof-of-concept developments on the horizon and continued focus by many players in the region on divesting of non-core properties, may set the stage for heightened deal flow in the region, assuming commodity prices continue to cooperate.

In 2018, there were several significant transactions in the Gulf of Mexico, for an aggregate value of $4.2 billion. Among these, a few stood out either due to size, because they marked the entry of a new player into the region, or both. Specifically, Kosmos Energy Ltd. entered the area with the acquisition of First Reserve-backed Deep Gulf Energy Cos. for $1.23 billion, Energy XXI Gulf Coast Inc. merged with and into Cox Oil Offshore LLC in a deal valued at $322 million, and Fieldwood Energy LLC bought Noble Energy Inc.’s position in the Gulf of Mexico for $710 million.

The rationale consistently cited for these, and other, recent transactions is that there has been increased opportunity to acquire existing production and infrastructure, as many competitors in the region have left the field to pursue onshore plays. Many exits from the Gulf of Mexico over the last couple of years have been part of a portfolio high-grading strategy implemented in reaction to price pressures.

We expect this trend to continue in 2019. Majors such as BP and Total are expected to shed “a mix of non-core country exits … low margin and tail-end assets,” according to global natural resources consultancy Wood Mackenzie, and Gulf of Mexico assets are anticipated to be among those divested. Conservative private equity investors may also be looking to sell off mature assets as they near the end of their life cycles.

Gulf Expectations

In addition to the above M&A drivers, there are other new developments approved or underway that could further facilitate investment in the region, providing more tailwinds to M&A activity in 2019. In fact, according to Wood Mackenzie’s annual outlook for 2019, Gulf of Mexico exploration activity is expected to increase by 30% in 2019.

One of these new developments is Shell’s Appomattox deepwater oil and gas project in Mississippi Canyon Block 392, which will mark the first production ever from a Jurassic reservoir in the Gulf of Mexico and is projected to be a big producer.

Another, Chevron’s Anchor project in Green Canyon Block 807, is expected to be the first ultra-high-pressure project in the world to reach a final investment decision (FID) and safely produce at 20 ksi. The current upper limit is 15 ksi. Wood Mackenzie believes the Anchor project’s success could usher in additional investments of up to $10 billion in the Gulf of Mexico.

Cost/Benefit Analysis

If Appomattox proves successful and Anchor achieves FID, these developments may entice some existing players to divest of more mature and tested assets that offer tie-back expansion opportunities in order to free capital for Jurassic and ultra-high pressure exploration. Such mature and tested Gulf of Mexico assets may appeal to private equity as well as smaller players who don’t have the capacity or appetite to invest the large amounts of money and time that deepwater greenfield development may otherwise require.

Notwithstanding the above, even as M&A opportunities abound in the region, costs for deepwater exploration and development remain an issue. However, there are several factors that make Gulf of Mexico assets attractive. The region offers additional economic benefits over other global deepwater plays, including limited country risk, significant existing infrastructure, and proximity to U.S. Gulf Coast markets for oil and natural gas.

Technological innovations in deepwater drilling, such as predictive maintenance analytics and remote operations, will continue to result in increased efficiency and enhanced recovery. Recent U.S. corporate tax cuts could further increase profit margins, with the potential to reduce breakeven costs by another $2 to $3 per barrel.

The primary variable, as ever, is commodity prices. Probably most important for the 2019 M&A outlook is that the commodity price remains relatively stable. Global production has increased in 2019, led largely by U.S. onshore shale production, but that has been offset somewhat by OPEC’s agreement in December to take 1.2 MMbpd off the market for the first six months of 2019. The result has been relative price stability, with WTI spending most of 2019 in the mid-$50 range.

 If this price stability can hold, then that, taken together with recent and upcoming technological innovations, corporate tax cuts, and ample opportunity to acquire high-quality assets, presents a landscape for increased M&A activity in the Gulf of Mexico in 2019. P&GJ

Authors: Jeremy Kennedy is a partner and member of the firm’s Global Energy Industry Group. His practice focuses on upstream, midstream and downstream transactions in the domestic and international energy sectors. He concentrates on the structuring, documentation and negotiation of oil, gas and petrochemical transactions including, acquisitions and project development.

Kelli Sims is an associate in the firm’s Mergers & Acquisitions and Project Development & Finance practices, and a member of the firm’s Energy Industry Group. They are based in the law firm’s Houston office. 

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