U.K.-based international energy company BG Group Plc (London: BG) has stamped its footprint in the Haynesville shale play in East Texas and North Louisiana, taking a 50% interest in certain holdings of Dallas-based explorer Exco Resources Inc. (NYSE: XCO) in a deal valued at US$1.3 billion.
BG Group will pay $655 million for a 50% interest in its producing and nonproducing assets in an area of mutual interest (AMI) involving approximately 120,000 net acres, and will pay 75% of Exco’s drilling and completion costs on developing the deep rights up to $400 million. In addition, BG is acquiring a 50% interest in related gas-gathering and transportation assets for $249 million.
Of the 1.055 billion for upstream assets, BG Group estimates the consideration equals $0.40 per thousand cubic feet.
The deal involves most of Exco’s holdings in East Texas and North Louisiana including Oakhill, Holly, Kingston, Caspiana, Danville, Longwood/Waskom, Carthage and Minden fields. The existing assets within the AMI include some 120,000 net acres with approximately 65,000 net acres in East Texas and 55,000 net acres in Louisiana. Approximately 84,000 net acres are prospective for Haynesville shale development in DeSoto and Caddo parishes in Louisiana and Harrison County, Texas. The companies will enter into a joint-development agreement for the Haynesville, Bossier and other deep horizons as well as the Cotton Valley, Hosston and other shallow horizons. Exco will continue as operator.
The deal excludes Exco’s Vernon Field in Jackson Parish, Louisiana, Redland Field in Bossier and Webster parishes, Louisiana, and the Gladewater and Overton fields in Gregg, Rusk and Smith counties in Texas.
Production is approximately 95 million cubic feet per day from the Cotton Valley and other shallower horizons and approximately 60 million per day from the Haynesville shale, with 78 million cubic feet net to BG Group, which expects net production to increase to 250 million cubic feet per day by 2012. As of year-end 2008, the Cotton Valley and other shallow rights included approximately 414 billion cubic feet equivalent of net proved reserves and approximately 445 billion equivalent of net probable and possible reserves.
BG Group values the Haynesville interests at $19,000 per acre. It reports the acquisition adds some 2.6 trillion cubic feet to its resources.
Exco chief executive Douglas H. Miller says, “We are very pleased and excited about our joint venture with BG Group. BG Group is a world leader in developing and marketing natural gas. With its strong technical and business capabilities in finding and commercializing reserves in 27 countries on five continents, BG Group will bring considerable expertise to the development of our Haynesville/Bossier shale assets.”
He adds both companies are committed to increasing the leasehold position and accelerating the drilling and completion efforts in the Haynesville and Bossier shales. “This transaction is a significant event for Exco, both in terms of the ability to aggressively pursue the Haynesville opportunities and in terms of strengthening our balance sheet to be in a position to capitalize on future opportunities in our core areas. We look forward to a long, mutually profitable relationship with our new partner.”
BG Group chief executive Frank Chapman says, “This alliance brings material new resources and supply to our existing U.S. business at a competitive price and in a prime location at the heart of the world's largest gas market. These domestic exploration and production activities yield strong synergies with the group's established LNG import and 3.5 billion standard cubic feet per day U.S. gas-marketing business. Furthermore, the transaction increases BG Group's exposure to long-term unconventional gas resources and skills. We look forward to working with Exco on this strategic partnership to deliver the significant growth potential of these assets.”
The Haynesville/Bossier shale acreage is under development, and Exco estimates that its current acreage position, most of which is held by shallow production, includes some 1,600 undrilled Haynesville locations containing net potential reserves of 4 trillion to 6 trillion cubic feet equivalent, with significant additional potential in the Bossier shale. Exco and BG Group plan an aggressive development program, particularly in the Haynesville shale, for the remainder of 2009 and in future years. To date, Exco has completed eight horizontal wells in DeSoto Parish with an average initial production rate of 23 million cubic feet per day on restricted chokes. Exco plans to drill an additional 34 horizontal Haynesville wells in 2009, of which 27 will be operated.
The $400-million drilling and completion cost commitment by BG Group is expected to be satisfied in 2011 or 2012. The companies will share equally in additional leasehold and asset acquisitions within the AMI.
In addition, BG Group will acquire a 50% interest in Exco’s midstream business, exclusive of Vernon Field midstream assets, in the area for $249 million in cash. The companies plan to jointly develop and grow the midstream business as well. Exco currently owns more than 700 miles of pipeline and gathering assets in the area and is constructing a 29-mile, 36-inch header system to transport its Haynesville gas production. Throughput in the midstream business to be contributed to the joint venture is approximately 440 million cubic feet per day of which approximately 50% is Exco gas and 50% is third-party gas.
Exco says upfront cash of $904 million will be used to repay a $300-million senior unsecured loan with the remainder applied to credit facilities.
BG Group will be a valuable partner in Exco’s gas-marketing efforts as well, Miller says, as BG currently markets approximately 3.5 billion cubic feet per day through 66 major interstate and intrastate pipelines serving markets throughout the Midwest and Eastern U.S. “BG Group will be an extremely valuable partner in our gas-marketing efforts,” he says.
Closing is expected in the third quarter. The effective date is Jan. 1, 2009. Goldman, Sachs & Co. is advisor to Exco. Deutsche Bank is advisor to BG Group.
Analysts at Tudor, Pickering, Holt & Co. Securities say the deal values Exco’s Haynesville holdings at a 15% to 20% premium and is “accretive to Exco on almost any metric.” TPH values proved reserves at $3.64 per Mcfe vs. the pre-deal valuation of $2.50 per Mcfe. On flowing barrel metrics, Exco is getting $81,000 per barrel equivalent vs. pre-deal metrics of $71,000 per barrel. “Deal value is clearly in unbooked potential, where BG mentions paying 50% for 84,000 Hayneville acres at $19,000 per acre.”
Citi analyst Mark A. Bloomfield says BG’s move into U.S. shale gas appears to be “commercially sound” based on an acquisition price of $2.40 per BOE, comparing favorably with other recent shale-gas transactions including $6.50 for StatoilHydro’s Marcellus acquisition, and BP Plc’s Fayetteville and Arkoma acquisitions for $3.50 per BOE.
“There is also a sound strategic logic in that BG will now be able to meet its gas sales obligations around the Elba Island and Lake Charles LNG import terminals,” Bloomfield says, thus reducing its exposure to a gas-price squeeze if it is short LNG into the terminals in times when it makes better margins in markets outside the U.S.
