Joint ventures in the upstream oil and gas sector are alive and well. In an environment hampered by depressed asset valuations and weak capital markets, companies are looking for ways to accelerate their deleveraging efforts, broaden their capital funding options and live to fight another day. Some have found the JV structure, using industry partners rather than financial partners, provides short- and long-term solutions and is a viable alternative.

But how do JV valuations stack up against multiples paid in traditional asset sales over the past few quarters? Have companies found a way to receive attractive multiples in an environment where A&D activity is marginal at best?

Perhaps.

Peak performance. Preliminary valuations of some recent JVs are not only higher than those of traditional asset sales in today’s environment, but surprisingly more comparable to asset valuations when commodity prices peaked in 2008. Companies with strong cash positions are entering into JVs with and paying significant dollars to large, public E&P companies in return for access to the latter’s superior operating expertise and long-term exposure to resource plays with a high barrier to entry.

Chesapeake Energy Corp. was one of the first to embrace the JV concept following the market downturn in 2008, and realized attractive valuations in each of its major shale plays. According to a recent investor presentation, Chesapeake acquired $8.6 billion of leasehold in these major shale plays (including the Barnett) and, via JV, subsequently sold down approximately 25% of their positions for $8.6 billion. This resulted in a remarkable net dollar-per-acre cost basis of zero.

Double the multiple. Similar valuations have been seen in some of the more recent JVs, including those between Quicksilver and Eni, and between Exco Resources inc. and BG Group. In May 2009, Eni SpA agreed to pay $280 million to acquire a 27.5% interest in Quicksilver’s existing Alliance project. Based on a preliminary analysis of publicly available information, the assets have a proved reserves-to-production ratio (R/P) of 22 years.

On a proved reserves and net production basis, Eni paid approximately $2.14 per proved Mcfe and $17,000 per thousand cubic feet equivalent per day (Mcfe/d), respectively.

Quicksilver’s JV metrics were surprisingly similar to majority-gas transactions in third-quarter 2008, where the median R/P was approximately 20 years and the median price per Mcfe/d paid was $18,500. When comparing the price per Mcfe/d multiple Quicksilver received to the median transaction in the current market, it’s almost double.

The multiple Quicksilver received is also more in line with third-quarter 2008 transactions and notably higher than most of the transactions closed year-to-date.

Upside value returns. In late June 2009, BG Group Plc agreed to pay $1.055 billion to acquire a 50% interest in Exco’s existing East Texas/North Louisiana producing and nonproducing properties. Based on information gathered from the seller’s press release and corporate presentation dated June 30, the transaction appears to yield attractive multiples.

The $13,613 per Mcfe/d multiple that Exco received is well above today’s median, despite the fact that the corresponding 10-year R/P is quite a bit lower than today’s average deal. Deals with a lower R/P tend to trade for a lower price per Mcfe/d multiple and vice versa, but not in this case. Exco managed to receive a very respectable price per Mcfe/d valuation while having a relatively low R/P, which is reminiscent of several 2008 asset transactions and usually implies that additional value was received for nonproved upside.

Exco also managed to receive an attractive price per Mcfe valuation. Exco proved reserves were valued at $3.64 per Mcfe, or $0.40 per 3P (proved, probable and probable) potential. Such a valuation for proved reserves is nearly double that of deals announced year-to-date and almost 50% higher than all majority-gas transactions since the beginning of 2008.

Although these valuations are subject to change prior to closing, preliminary indications show Exco received credit for its highly touted 3P and “potential” reserves—in an environment where natural gas prices are suffering and where sellers are struggling to receive value beyond their proved developed producing reserves.

Timely tool. Despite the fact that the JV structure causes E&P companies to sacrifice a portion of their upside in these resource plays, the financial boost they receive from their cash-heavy industry partners is nothing short of timely. We can speculate that weakness forced these companies to do these deals because of the lack of capital from the public markets, but ultimately they were able to demand and receive respectable valuations in return for their operating expertise and strategic positions in emerging plays.

Only time will tell whether or not the joint-venture concept is the way of the future or simply a way to weather the storm created by unfavorable market conditions.

—B.J. Brandenberger,

Energy Spectrum Advisors Inc.

(energyspectrumadvisors.com)

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