EPL Oil & Gas Inc. (NYSE: EPL) agreed to be bought by main rival Energy XXI Ltd (Nasdaq: EXXI) Wednesday in a $2.3 billion deal billed as creating the biggest publicly owned independent oil producer on the U.S. Gulf of Mexico shelf.
Energy XXI said it expects an enterprise value of about $6 billion after the deal is closed.
The acquisition will increase the company's production to roughly 65,000 barrels of oil equivalent per day, up from about 45,100, Energy XXI said. When joined, the combined company will own and operate 10 oil fields on the shelf with cumulative production each surpassing 80 million barrels of oil.
The two similar companies are an ideal fit, and the integration is expected to be seamless.
"EPL's assets and operations closely resemble our own, predominantly oil, with some of the highest margins in the industry and extraordinary opportunities for reserves and production growth through development and exploration activities," Energy XXI Chairman and Chief Executive Officer John Schiller said in a statement.
The combined company will be based in Houston, where EPL has headquarters. Schiller will serve as chairman and CEO of the combined company.
At first glance, it looks like EPL shareholders are getting the better part of the deal. EPL shares surged more than 30% intraday to $39.26.
Meanwhile, EXXI shares slipped 7% to $21.32.
But for EXXI shareholders who stick around, the deal is likely to pay off over the long term.
Oil Companies Go Fishing in the GulfThe EPL buy is Energy XXI's largest deal since 2010, when it agreed to buy nine oil and gas fields in Gulf of Mexico shallow waters for $1.01 billion from oil behemoth Exxon Mobil Corp. (NYSE: XOM).
"The merger is consistent with EXXI's strategy of bulking up in Shelf through acquisitions and squeezing oil out of older fielders," energy investment and merchant bank Tudor, Pickering, Holt & Co. analysts wrote in a note.
The U.S. Gulf of Mexico has been a lucrative spot for oilfield services companies over the last couple of years thanks to rising drilling activity and increased capital spending in the region.
The Gulf of Mexico is attractive to oil companies due to its geopolitical stability and proximity to refiners, as well as it strong pipeline and production infrastructure. It accounts for roughly 23% of total U.S. crude oil production and about 7% of total dry gas production.
When compared to unconventional drilling methods in other U.S. territories, the Gulf of Mexico is also likely to provide more stability long term considering the region's vast reserves and solid infrastructure.
Output from the Gulf is expected to rise by some 26%, from around 1.5 million barrels of oil a day to more than 1.9 million barrels of oil a day, between 2014 and 2019, according to the U.S. Energy Information Administration.
Moreover, a large portion of the Gulf of Mexico still remains untapped. The U.S. Department of the Interior estimates the Gulf has 48 billion barrels of oil yet to be discovered.
That's why companies with a firm focus on the Gulf of Mexico shelf are turning to acquisitions. Bigger is indeed better in the oil industry.
The move underscores the increased competition Energy XXI and EPL face from private equity backed companies who are snapping up U.S. Gulf assets sold off from oil giants such as Apache Corp. (NYSE: APA) and Devon Energy Corp. (NYSE: DVN), as well as smaller players such as SandRidge Energy Inc. (NYSE: SD).
Indeed, Fieldwood Energy, owned by private equity firm Riverstone Holdings LLC, is now the largest player in the shallower continental shelf region of the Gulf. It got there buying Apache's Gulf shelf assets for $3.75 billion in July and purchasing SandRidge's assets for $750 million in January.
Apache explained the sale as a means of rebalancing its portfolio. SandRidge said it decided to focus its efforts in the Mid-Continent, where it has a competitive advantage.
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The post EPL Oil & Gas (NYSE: EPL) Soars 30% on $2.3 Billion Deal with Energy XXI (Nasdaq: EXXI) appeared first on Money Morning - Only the News You Can Profit From.
