Oil and gas operators rocked the offshore boat in a matter of days in mid-September with news of US $6.9 billion in transactions involving Gulf of Mexico (GoM) properties on the shelf and in waters deeper than 1,219 m (4,000 ft) as longtime operators, both public and private, continue the long exodus out of the region while a small flotilla of experienced players disembark on a consolidation spree in their wake.

The deals of September signal activity, both on the shelf and in deepwater, should top pre-Macondo levels in 2013 as instant gratification in demand for offshore services grows closer by the day.

In all, the GoM has witnessed more than $18 billion in transactions since January 2010 as the region, once left for dead and then pummeled by Macondo, rises from the foam like the mythological Venus.

Plains Exploration & Production Co. made waves once again in the Gulf when the Houston-based firm anted up $6.1 billion in two deals to acquire BP Exploration and Production Inc.’s (BP) interest in five fields, including Holstein in Green Canyon, the Marlin Hub, and Horn Mountain, which straddle the border between the Mississippi Canyon/Viosca Knowl blocks south of the Louisiana coastline, as well as Shell Offshore Inc.’s 50% interest in the Holstein field.

In all, Plains is acquiring 67,000 boe/d and 127 MMboe in proved reserves in the largest GoM transaction to hit the market since BP bought Devon Energy Corp. deepwater properties weeks before the Macondo incident in 2010.

When it comes to Plains, peripatetic has become the word. The company displays a riverboat gambler’s propensity to chase the hottest plays in oil and gas. Plains, for example, paid $3.3 billion to enter the dry gas Haynesville shale in 2008 with Chesapeake Energy Corp. in one of the industry’s earliest joint ventures. The company followed in October 2010 with a fortuitous $578 million entry into the Eagle Ford, taking out Dan A. Hughes Co. LP properties in the heart of the condensate window.

Sometimes a riverboat gambler has to know when to fold them. Plains held a non-operated working interest with McMoRan Exploration Co. in a cash-consuming, high-stakes bid for subsalt dry gas before exchanging its working interest in 2010 for $818 million in McMoRan equity.

Plains also fell short selling its deepwater portfolio at the end of 2010 in the aftermath of Macondo when it couldn’t find the right buyers during an attempt to exit cash-voracious non-operated working interests offshore. The company at the time said it had embarked on a transformative strategy to transition from a gas-focused company with non-operated offshore assets into a mostly operated, onshore company with assets in California, the Granite Wash, Eagle Ford, and Haynesville.

Plains is tossing that old transformative strategy overboard as the company embraces a new transformative strategy that now involves an exit from the Haynesville shale and Wyoming’s dry gas Madden field by year end 2012. Additionally, Plains plans to monetize its McMoRan equity stake in 2013.

At that point, the company will be going off the deep end, figuratively speaking, as it funnels proceeds from its onshore and equity divestitures towards developing 323 MMboe in resource potential from its newly operated deepwater assets. Plains has its spyglass trained on a potential 25% return from high-margin, low-risk barrels by 2020 and expects the offshore package to provide $4 billion to $5 billion in free cash flow by 2016.

The Holstein Hub reportedly has a 1.2-billion-boe resource potential in 13 potential development wells.

Plains’ turnaround strategy calls for capex increases targeting the newly acquired offshore properties to offset declines in the company’s Eagle Ford efforts, which it indicates will be drilled out by 2016. In the meantime, the company is obligated for a half billion dollars in non-operated working interest to fund Anadarko Petroleum Corp.’s Lucius project in 2013.

To recap, a company that sought to capitalize as an operator in onshore unconventional oil and gas as a way of offsetting non-operated financial obligations offshore is now selling some of its operated onshore portfolio to finance a bold transition, in part, to an operated offshore portfolio.

Anchors Aweigh

And that is only part of the good news for offshore drilling contractors. In fact, the Gulf is sailing behind other offshore regions globally as new contracts move higher in pricing both in waters below 1,212 m (4,000 feet), which has dominated news on recent awards, and in the jackup market.

For example, EPL Oil and Gas Inc., previously Energy Partners Ltd., awarded a three-month, $90,000 dayrate beginning in 4Q 2012 to Hercules Offshore Inc. for the Hercules 265, a 7,576-m (25,000-ft) jackup capable of working in water depths up to 75.76 m (250 ft).

Once again, a transaction lurks in the background. On Sept. 17, EPL announced plans to double its proved GoM reserves with the $550 million purchase of shelf properties from privately held Houston-based Hilcorp Energy GOM Holdings LLC.

It is the fourth shelf acquisition for EPL in the last two years as the company transitions to an oil-focused portfolio. EPL employs advanced seismic reprocessing to identify bypassed hydrocarbons behind pipe or overlooked new targets in legacy stacked play fields in shallow waters south of the Louisiana coastline.

Hilcorp, meanwhile, makes another successful exit, this time from the GoM, following a lucrative adios from the Eagle Ford in June 2011 when it sold its Eagle Ford assets for $3.5 billion to Marathon Oil Corp.

EPL’s latest acquisition brings production of 10,000 Boe/d, weighted 50% oil, and 36.3 MMboe in proved reserves, 95% operated, which the company describes as 54% oil and 42% PDP (proved developed producing). The acquisition doubles EPL’s reserves and increases its current production by 50% for a purchase price of $55,000 per flowing barrel and $15.16 per boe on a PDP basis.

Hilcorp originally acquired the properties from Chevron, but deemed them non-core before divesting them. New Orleans-based EPL meanwhile has identified 63 behind pipe opportunities and 28 PUD locations in the package as well as multiple sidetrack opportunities from existing wells.

It is yet another example of how oil and gas operators are using technology to find new oil in legacy fields, which has become a major stimulus in demand for offshore services. At mid-month September, Hercules Offshore reported four contract extensions for jackup rigs in the Gulf, all with higher rig rates. The extensions, as detailed in its monthly fleet status report, ranged up to 120 days with rig rates exceeding $80,000, more than double rates at this time last year.

There is a general consensus that rig rates for GoM jackups are headed above six figures.

And it’s not just jackups. Transocean Ltd. was awarded a three-year contract at $595,000 per day for the Deepwater Invictus, a newbuild ultra-deepwater drillship in the GoM. The contract is expected to commence in 4Q 2013. Transocean’s September fleet status report also noted a contract extension extended for 20 months in the GoM for a sixth-generation semisubmersible at $580,000 per day, $58,000 a day higher than the previous fixture.

Three’s A Charm

The third deal in the September GoM trifecta also will increase short-term demand for offshore rigs and services. Houston-based W&T Offshore Inc. ponied up $228 million to purchase the Gulf assets of Newfield Exploration Inc. Newfield, like Hilcorp and Devon, formally exits the GoM and is now focused primarily on liquids-rich onshore plays in the Midcontinent and Rockies.

An opportunistic W&T Offshore gained 65 deepwater blocks and 10 blocks on the shelf at a purchase price of $27,300 per flowing barrel of production. Only six of the 65 deepwater blocks – and four of the 10 shelf blocks – are producing. The Newfield properties are generating 8,350 Boe/d with proved reserves of 7.7 MMboe, including 71% PDP.

GoM transactions have been transforming the offshore space and creating renewed demand for drilling services even before the September 2012 GoM trifecta. The three bring GoM transactions to more than $16.2 billion since January 2010, featuring significant consolidation as players exit the Gulf, leaving future development in the hands of consolidators.

A partial list of billion-dollar deals joining the September 2012 trifecta includes Apache Corp.’s $1.05 billion purchase of Devon’s shelf properties in April 2010, Energy XXI’s $1.012 billion purchase of ExxonMobil shelf properties in November 2010, and SandRidge Energy Inc.’s $1.275 billion purchase of Dynamic Offshore Resources Ltd. in February 2012.

Other deals include Apache Corp.’s $3.9 billion acquisition of Mariner Energy in April 2010, including deepwater and onshore assets.

Like the deals that transpired previously, September’s GoM forays point to short term increases in activity on the shelf and accelerating expansion in the simmering pot of deepwater exploration.

Contact the author, Richard Mason, at rmason@hartenergy.com.

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