Chevron sale shows independents see life in shallow-water GoM

Bullish on oil? Too cheap an opportunity to ignore? Or confident of using the latest technologies to extract value? Regardless of its motives, Cox Oil Offshore’s purchase of 19 fields and associated assets from Chevron shows there is life in the Gulf of Mexico’s shallow-water market.

The assets, sold for an undisclosed sum in late April, are located primarily in the shallow-water section of the GoM that are closer to the southern US coastline and in Louisiana state waters. The sale included 170 active wells, 70 platforms, 70 caissons and other offshore structures.

When Chevron confirmed earlier in the year that 27 shallow-water fields were up for sale in the GoM, analysts at investment bank Tudor, Pickering & Holt valued the package at more than $1 billion. The fields generated $420 million in earnings before interest, taxes, depreciation and amortization in 2015, and pumped a combined 46,000 barrels per day in 2010.

Assuming Tudor, Pickering & Holt’s estimate was close to the mark and that Cox’s purchase was therefore worth about $700 million, that would come close to covering Chevron’s $725 million first-quarter loss. The Cox-Chevron deal may also have guaranteed Chevron a share of revenues over a certain period of time, as has been the case in other offshore asset transfer such as Talos Energy’s acquisition of Stone Energy assets in 2014.

Many possible motives

Cox declined to comment on the sale when contacted by Upstream Intelligence. But this was the first notable GoM asset transfer since the International Association for Energy Economics said in February that well-capitalized E&P companies were well positioned to pay bargain prices to acquire assets. In the IAEE’s opinion, low oil prices have created an opportunity for smaller operators to “reposition” their business.

Oil prices have staged a “remarkable recovery” since hitting lows of less than $30 in February, and “it could well be that Cox simply thinks oil prices will continue rising”, one veteran of the oil and gas market told Upstream Intelligence.

A financial analyst familiar with both companies, who also asked not to be named, said the asset transfer could have been a matter of scale: what is small for Chevron may be suitably large for another company.

“These are shallow-water assets, so they will not be expensive to develop. As a result, Cox may be able to make money off these assets even in the current low-oil environment,” the analyst said.

Cox may have also been emboldened by the achievements of peers such as Talos Energy, which has used seismic technologies and improved methods of slant drilling to identify viable wells in areas previously thought depleted. Talos recently brokered a deal with the Mexican government for shallow-water drilling rights in the southern GoM.

Deepwater still the prize

Whatever the motive, Cox has moved against the tide. When oil prices were high in 2014, it encouraged the likes of Apache Corp, Saratoga Resources and Energy XXI (which has since filed for bankruptcy) to use new technologies to find hidden reserves and squeeze more oil out of mature fields. But with no certainty on commodity prices and cash flows, many operators are “hard-pressed” to move forward with drilling programs, John Rynd, Chief Executive of contractor Hercules Offshore, said in a recent earnings call.

The latest Baker Hughes Rig Count showed there were 24 rigs in the Gulf of Mexico as of May 20, 2016, down from 33 one year earlier. Shallow-water permits have also plunged, according to Evercore ISI’s monthly drilling permit report. Only three permits have been issued so far in 2016, down 89% from this time last year and 93% from 2014.

“Offshore drilling will continue to show anemic movement as long as shallow-water permits remain at historically low levels,” said the firm.

According to Hercules, a shallow-water rig currently costs about $25,000/day to operate. Coldstacked rigs, in which crews are trimmed down to a skeleton staff and stored in a shipyard or other designated area, cost up to $2,500/day to maintain. Hercules sold four of its shallow-water rigs in 2015 to an unnamed buyer for an undisclosed price, claiming poor business due to lower oil prices. Shallow-water wells cost about $10 million to install, deepwater wells $50 million to $100 million.

Deepwater remains “the big prize,” as a Wood Mackenzie official noted at a recent energy conference. The US Energy Information Administration has credited improved equipment with increasing the increase pace of growth in deepwater exploration, and this has also led to lower demand for shallow-water rigs.

By Ivan Lerner