Thursday, June 30, 2011

Mitsui and SM Energy form Eagle Ford JV. Adjusted $/acre settles at ~11,000/acre

SM Energy Co (SME) entered into an agreement with Mitsui concerning a 12.5% working interest in its non-operated Eagle Ford shale position. The company will be carried on 90% of its drilling and completion costs (excluding costs associated with construction of mid-stream gathering assets) in this acreage until $680 million has been expended for the benefit of SM Energy.

Asset highlights:
  • The project comprises 310,000 gross acres in which Anadarko holds 73% operated WI (~225,000 net acres) and 27% WI is held by SME (~85,000 net acres). Post transaction, SME will have 14.5% WI (~46,000 net acres) in the non-operated portion of its Eagle Ford shale position
  • The acquired acreage includes Eagle Ford (~39,000 acres) and Pearshall acreage (~8,000 acres) and spans across Dimmit, Maverick and Webb counties;
  • Reported average daily production from SME's total non-operated Eagle Ford shale position at the end of the first quarter was 43.5 MMcfe/d / 23.36 MMcfe/d for Mitsui's 12.5% interest (42% oil, 36% natural gas, and 22% NGLs)
  • Proved reserves associated with SME’s total non-operated Eagle Ford shale position as of December 31, 2010 were 52 Bcfe (27.93 Bcfe for Mitsui's 12.5% interest). 48% of these reserves are proved developed.
$/Acre- Valuation Analysis
The value of the reserves is estimated to be $233 million (at $60,000/Daily BOE). In addition, the value of Pearsall acreage is estimated at $16 million (at $2,000/Acre). The remaining deal value of $430 million is ascribed to Eagle Ford acreage ($11,036/Acre). The metrics are calculated without discounting the future carry costs.

To see what other operators are reporting on "Eagle Ford", use our oil and gas document library:

Vigorous growth in Eagle Ford transaction activity:

Activity in the Eagle Ford play has been high in the recent months. In 2010 in the Eagle Ford, 1,018 drilling permits were issued through November, up from 94 the year before, and output of crude oil, condensate and other liquids nearly quadrupled to 3.9 million barrels, according to Texas Railroad Commission data.
In 2010, Eagle Ford Play had generated close to $2.9 billion in revenue and provided nearly $47.6 million in local government revenue. Over the next 10 years, it is expected that more than 5,000 new wells will be drilled and generate more than $21.5 billion in total annual economic output.
Some of the world's biggest oil companies - including Shell, BP, Statoil, Marathon, KNOC and CNOOC - have recently entered the Eagle Ford and taken the acreage metrics to a new bench mark level. Four years back, the acreage cost in the Eagle Ford play was $100-$200/acre which in 2010 was reaching an average price of $10,000/acre. The recent deals by Marathon and KNOC have moved it to another higher level of $20,000-$25,000/acre. The following interactive graph shows the Eagle Ford deals done by these majors.

A good progress in pipeline infrastructure in Eagle Ford play
The Eagle Ford has its high content of valuable crude and natural gas liquids. But along with the optimism, some operators worry that growth could be held back by equipment constraints and a potential lag in building new pipelines, processing plants and other infrastructure. Though the pipeline infrastructure in Texas is very mature, especially for oil and natural gas, the system needs significant investments to process natural gas liquids.
In 2010, investments in midstream development in the Eagle Ford play accounted for an estimated $404.3 million. With more than 130 miles of new pipeline activity, including the continued development of the Chisholm, Dilley, Dos Hermanas, Leona, and Fox Creek pipelines, all indications are that over the next three to five years midstream activities will continue to play a significant role in the development and economic prosperity of the region. The following table shows the midstream deals regarding Eagle Ford play.
Source Documents:

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