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Two Players Now Control the Oil Here

Two Players Now Control the Oil Here

In August 2013, I wrote about opportunities shaping up for junior E&Ps in the shallow-water Gulf of Mexico Shelf (see "Junior Time in the Gulf of Mexico Shelf").

It now appears that has come to pass. So much so, that two juniors have grabbed up this entire space.

That pattern was cemented yesterday when major Shelf player Energy XXI (Nasdaq: EXXI) announced it will acquire fellow regional producer EPL Oil & Gas (NYSE: EPL) for $2.3 billion. A deal that would make Energy XXI the largest independent producer and acreage holder in this region.

This brings to a close a round of consolidation in the Shelf that came hard and fast.

Things kicked off last summer with Apache's sale of its acreage here to energy private equity gurus Riverstone Holdings--the deal that prompted my original write-up.

Since then, Riverstone--through its operating company Fieldwood Energy--has also picked up the Shelf assets of SandRidge Energy.

Thos deals made EPL the last significant stand-alone in the Shelf. A fact Energy XXI obviously noticed. With these two firms now coming together, there simply aren't any large acreage packages left here outside the control of major companies.

That's a flurry of activity. Equating to nearly $7 billion worth of spending in under nine months.

Such big numbers might seem strange for a play area largely regarded as being old and declining. But it actually makes perfect sense when you look at recent drilling metrics here.

Energy XXI has been seeing phenomenal returns on capital re-completing old Shelf oil fields using horizontal drilling. Their slogan has been "the next 5%"--referring to the company's goal of growing recoverable reserves by 5% across its portfolio of oil pools, through the use of advanced technology.

The results of such an achievement would be significant. Following the EPL acquisition, Energy XXI's management estimates that a 5% recovery increase would double its reserves. That would be a phenomenal achievement--in any part of the world.

These events in the Shelf are one of the most significant developments in oil for years. Tomorrow, in my new project letter Prime Meridians, I'll be talking more about what the drilling success here means--both in terms of local operators, and the wider implications for next-generation oil development globally.

Here's to the next 5%,

By Dave Forest




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