Big Oil looks for home runs in Gulf and beyond

El­e­vated by oil’s jump, ma­jors shift­ing pri­or­i­ties to more prof­itable dis­cov­er­ies

Calgary Herald - - FINANCIAL POST - KEVIN CROW­LEY AND DAVID WETHE

HOUS­TON Big Oil is giv­ing up look­ing for sin­gles and dou­bles in the Gulf of Mex­ico: Now it’s home runs or bust.

Exxon Mo­bil Corp. and Royal Dutch Shell Plc, the world’s two big­gest oil com­pa­nies, have put a slew of as­sets in the Gulf up for sale in re­cent weeks, while Brazil’s state-run Petro­bras this week sold the bulk of its pro­duc­tion in the re­gion to mid-cap ex­plorer Mur­phy Oil Corp.

The ma­jors are not leav­ing the Gulf al­to­gether but they are shift­ing pri­or­i­ties. They’re us­ing oil’s climb to a four-year high above US$86 a bar­rel to off­load older as­sets that are past their peaks to fo­cus on big­ger, more prof­itable dis­cov­er­ies, ei­ther in the deep­est reaches of the Gulf or un­ex­plored seas else­where in the world. The mes­sage is clear: Go big or go home.

“When oil was in the dol­drums, com­pa­nies were much hap­pier to sit on as­sets that per­formed as ex­pected,” said Oma Wilkie, a se­nior an­a­lyst at RS En­ergy Group. “But with Brent push­ing $80, they can hope­fully get top dollar for as­sets that are OK but not the best in the port­fo­lio.”

The sales come at a time when pro­duc­tion from the Gulf has reached record lev­els — 1.85 mil­lion bar­rels a day — but has been dwarfed by the growth of on­shore shale. The re­gion now makes up just 17 per cent of U.S. to­tal pro­duc­tion, down from 27 per cent a decade ago.

Exxon, Shell and Petro­bras may have all put “for sale” signs up but their rea­sons for do­ing so are dif­fer­ent.

For Exxon, cash is in high de­mand. The world’s big­gest oil ex­plorer by mar­ket value is ramp­ing up spend­ing on off­shore plays such as Guyana and Brazil in a bid to re­vamp its strug­gling up­stream divi­sion, where pro­duc­tion has stag­nated and re­turns lag those of peers. Of­fload­ing older as­sets would boost the com­pany’s av­er­age re­turn on eq­uity, a key met­ric for in­vestors.

Exxon is “test­ing mar­ket in­ter­est” for sev­eral Gulf as­sets but “re­mains com­mit­ted” to the re­gion, where it also has re­finer­ies and chem­i­cal plants, the Irv­ing, Tex­as­based com­pany said in a state­ment Oct. 3.

Shell, which ranks along­side BP Plc as the Gulf ’s largest pro­ducer, has no plans to leave, hav­ing sanc­tioned giant new projects Ap­po­mat­tox in 2015 and Vito ear­lier this year.

But it is in talks to sell US$1.3 bil­lion of Gulf as­sets to Fo­cus Oil, peo­ple fa­mil­iar with the mat­ter said last month. Shell is look­ing to pay back debt from its pur­chase of BG Group in 2016 and in­vest in new projects such as a mas­sive ga­s­ex­port com­plex in Canada.

Shell spokes­woman Kim Win­don de­clined to com­ment on as­set sales. “Deep wa­ter is a growth pri­or­ity for Shell,” she said. “Across the deep wa­ter sec­tor in en­ergy, we have an un­matched set of re­source op­tions from which to make com­pet­i­tive choices.”

Petro­bras’s deal with Mur­phy was all about cash. The Rio de Janeiro-based ex­plorer planned to sell US$21 bil­lion in as­sets by the end of this year, but with less than three months to go and in the midst of a con­tentious pres­i­den­tial elec­tion cy­cle, the com­pany is still well short of its goal.

The Mur­phy deal will gen­er­ate cash and help the com­pany share out in­vest­ment costs, Petro­bras said in a fil­ing. The com­pany ’s me­dia-re­la­tions depart­ment didn’t re­spond to a re­quest for com­ment.

For buy­ers, the at­trac­tion of the Gulf is ob­vi­ous. It pro­vides re­li­able pro­duc­tion, a vast pipe­line net­work and am­ple ac­cess to ship­ping. Along­side Mur­phy, pri­vate eq­ui­ty­backed names such as LLOG Ex­plo­ration Co., EnVen En­ergy Corp. and Ridge­wood En­ergy have been cited as po­ten­tial buy­ers.

Costs have fallen dra­mat­i­cally since the 2014-to-2016 down­turn, mak­ing the Gulf more at­trac­tive to new en­trants. Rig rates have dropped by half while op­er­a­tors have fig­ured out how to drill wells al­most twice as fast as in 2014, ac­cord­ing to Wood Mackenzie Ltd.

As such, ex­plor­ers are mov­ing deeper into the Gulf in the hunt for big new dis­cov­er­ies. Some 25 rigs are un­der con­tract in the deep­est wa­ters com­pared with 12 in shal­lower seas, Ever­core ISI said in a note last month. But to make big dis­cov­er­ies in the deep, it helps not to be weighed down by older as­sets else­where.

“It’s about selling as­sets that still have some meat on bone,” said Im­ran Khan, an an­a­lyst at Wood Mackenzie. “Then you can fo­cus on your core port­fo­lio.”

SAUL LOEB/AFP/GETTY IM­AGES FILES

Ex­plor­ers hun­gry for big dis­cov­er­ies are aim­ing to sell old as­sets for top dollar and mov­ing deeper into the Gulf of Mex­ico. Out­put in the re­gion has hit record lev­els of 1.85 mil­lion bar­rels a day and costs have fallen dras­ti­cally since the down­turn from 2014 to 2016.

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