Despite the oil price crash mid-year 2014, it was a record year in transaction value involving shale assets in North America. Nearly 65 billion USD were involved in shale E&P transactions in North America during 2014. After the oil price crash of 2009, transactions also ramped up and stayed at similar levels for three consecutive years, as shown in Figure 1. If history serves us right and this trend repeats, 2015 will be a year with high shale E&P transaction value. However, up to April 2015, only 200 million USD have been included in such transactions with 94% of the deals involving assets in Eagle Ford, Marcellus and Permian shale plays.
Figure 1. North America Shale transaction value per country and play
There is no surprise that a large portion of the 2015 deals to date have involved mostly liquids plays such as Eagle Ford and Permian. Assets located in both of these plays hold WTI oil breakeven prices below 60 USD/bbl, as shown in Figure 2. Going forward, numerous transactions will possibly involve assets in both DJ and Powder River basins. Shale plays in these basins (e.g. Niobrara) offer competitive economics at well level – the breakeven WTI oil price in the Wattenberg area alone is below 45 USD/bbl. Companies such as Noble Energy and Bill Barrett hold a significant position in Niobrara-Wattenberg. Rystad Energy considers Noble Energy as a good candidate for company acquisition due to its competitive average wellhead breakeven oil price, oil-weighted production and reserves, acreage location in prolific areas of both Niobrara (DJ Basin) and Marcellus (liquids-rich area in Pennsylvania), among others.
Figure 2. Average breakeven WTI oil price for selected US shale oil plays
In order to analyze the potential for company acquisition within US shale, it becomes relevant to evaluate key metrics such as quality of acreage positions (core or non-core), remaining locations, enterprise value and the change in the share price of the companies, as shown in Figure 3.
Figure 3. Key parameters for the analysis of E&P shale company acquisition
With a 32% decrease in share price since June 2014 and competitive well economics, Noble Energy is still expected to deliver a considerable upside in case it gets acquired.
When evaluating companies with a decrease in share price of over 50%, Whiting Petroleum stands out as also a potential candidate for company acquisition. Along with a decrease in share price, Whiting’s acreage is well-positioned in core areas of both Bakken and Niobrara shale plays, especially after it acquired Kodiak in 2014. Whiting has been looking at a potential sale of its assets and several companies such as ExxonMobil, Statoil, Hess and Continental have already reported an interest in this opportunity.
Based on a fixed WTI price of 90 USD/bbl, Rystad Energy estimates Whiting’s E&P net present value (NPV) is 14 Billion USD. This total NPV is split between developed reserves (already producing wells) and undeveloped reserves (wells not yet drilled), as shown in Figure 4. This figure also shows the NPV for two different WTI oil prices. By comparing the 14 Billion USD total NPV with the enterprise value of the company, Rystad Energy believes Whiting Petroleum is undervalued. Hence, even though a potential buyer would need to pay a premium over the market share price to acquire Whiting, it will be possible to create value through such an acquisition.
Figure 4. Whiting Petroleum's E&P net present value (NPV)