Slumping Output Raises Tough Questions for European Oil Giants

- Slumping Output Raises Tough Questions for European Oil Giants

Monday, August 01, 2011
Dow Jones Newswires
LONDON
by Alexis Flynn

When Europe's major oil companies reported quarterly earnings last week, headlines across national capitals once again excoriated the petroleum giants for soaring profits in the face of consumers anger at high fuel prices.

Yet the profits couldn't mask a trend that continues to trouble Wall Street and corporate boardrooms: Nearly every major oil company reported year-on-year oil and gas output declines, often in the double-digits.

Big Oil is throwing huge resources at the problem with more open embrace of unconventional petroleum developments, high-risk exploration in frontier areas and corporate restructuring. But even if these strategies work in some cases, there is little doubt that anemic petroleum output signals a long-term challenge confronting the sector.

The particulars varied across the sector. BP's 11% output drop was fueled in part by the continued hit from its reduced activity in the U.S. Gulf of Mexico after last year's disastrous spill. Italian giant Eni's production fell 15% due to its disproportionate exposure to war-ravaged Libya. Spain's Repsol, whose output fell 17%, was affected by both Libya and the U.S. Gulf, as well as by labor unrest in Argentina. Norway's Statoil saw a16% output decline largely on production outages and maintenance in its home market in the North Sea.

Oil giants are more vulnerable to operational problems in part because of their declining dominance over key resources. Whereas in 1973, independent oil firms controlled three-quarters of the world's reserves, they hold as little as10% today, according to some estimates. That has forced oil majors to rely to a greater extent on costly unconventional plays such as shale gas, deepwater exploration, and Arctic exploration.

Investment in conventional assets accounted for 63% of the majors' total capital expenditure between 2001 and 2005, research by Wood Mackenzie showed, with this proportion set to fall to 40% between 2011 and 2015.

Last week's reports showed that the two biggest oil giants, Shell and ExxonMobil, were somewhat better positioned than their smaller peers, in light of their capacity to progress capital-intensive projects. Another standout, Wall Street darling BG Group, the only European oil major to report higher year-on-year output, has prospered from recent discoveries in the hot Brazil offshore region.

Yet there are problems even with these templates. Though demand for natural gas remains solid, natural gas prices could see further weakness in light of surging North American shale gas output and economic weakness in Europe and the U.S.

The push for more exploration has ignited interest in Africa following new seismic results and recent discoveries in Ghana and Uganda. But it's a risky and capital-intensive game and one requiring a fleetness of foot to grasp opportunities and adapt quickly to contrary political circumstances. Industry anecdotes abound of how some of the most lucrative recent discoveries on the continent were once passed up by reluctant majors.

Consolidation offers another way forward, yet few expect large corporate mergers between integrated oil giants in light of antitrust concerns and today's high oil prices. More likely is a deal akin to Exxon's purchase of U.S. unconventional gas specialist XTO, a major factor in Exxon's standout 10% rise in production in the quarter. Wood Mackenzie's Simon Flowers predicts more such "infill acquisitions," but says "large-scale acquisition is not likely in the near term."

Another possibility is the flowering of deals between private oil giants and emerging state-controlled firms like Brazil's Petrobras, Russia's Rosneft and China's CNPC. BP's failed share swap and Arctic exploration deal with Rosneft was an example and illustrates the lengths to which companies are prepared to go to gain access to their potentially lucrative reserves.

Wall Street will likely push harder for some sort of tangible action from Big Oil in the coming months. The sector trades at a significant discount to the oil price itself, a factor that could sharpen calls for share buybacks and more special dividends. The recent move by ConocoPhillips to hive off its downstream business lifted the Texas company's share price and spawned questions for the rest of the sector. But so far, most of Conoco's peers have dismissed the idea as impractical in light of the advantages of the conventional integrated model.

Copyright (c) 2011 Dow Jones & Company, Inc.

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Williams Raises Bid for Southern Union to About $5.6B

- Williams Raises Bid for Southern Union to About $5.6B

Thursday, July 14, 2011
Dow Jones Newswires
by Ben Lefebvre

Williams Cos. raised its bid for Texas pipeline company Southern Union to about $5.6 billion in cash in the latest round of a takeover battle with Energy Transfer Equity.

Williams latest bid tops Energy Transfer's previous $5.1 billion cash-and-stock offer and its own previous bid of $5 billion in cash. The two companies have been competing to merge with Southern, with the winner of the competition expected to become the country's largest natural-gas pipeline company.

Williams said it hopes to have an agreement hammered out with Southern by Tuesday, which it maintains is enough time to share business data with Williams and hold the necessary management meetings to get approval.

"It's fairly simple as to what we have to offer," Williams Chief Executive Allan Armstrong said in an interview. "We don't think the decision process is real complex."

Representatives of Southern and Energy Transfer were not immediately available to comment.

Williams all-cash bid might be simple, but in the end it might not be as compelling as the company is portraying, said Morningstar equities analyst Jason Stevens said. Morningstar values Energy Transfer's cash-and-stock offer at $46 a share--higher than William's $44 a share offer--because of tax benefits and dividends the stock portion of the deal would offer. A merger with Southern might also force Williams to sell some of its pipeline assets in Florida to win over antitrust regulators, Stevens said.

"They'd have to sell their premiere assets," Stevens said. "It's just not as compelling an offer."

It might be difficult for Williams to go any higher than its current 10% premium to Energy Transfer's current offer, said BMO Capital Markets analyst Carl Kirst.

"Williams paying more than $44 would start facing investor blowback given the premium involved," Kirst said in an investors note.

Energy Transfer and Southern Union last week set a deal initially valued at $40 a share, four dollars lower than Williams's latest bid. Energy Transfer also agreed to sell some assets in order for the deal to pass muster with antitrust regulators.

The companies also raised the breakup fee for their agreement to $162.5 million from $92.5 million in the original agreement, another indication that a higher bid was expected. Williams in its latest bid said it would pay the breakup fee and related expenses for Southern.

Both companies had expressed willingness to assume Southern's debt, totaling $3.7 billion.

Copyright (c) 2011 Dow Jones & Company, Inc.

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UK Govt Raises Field Allowance for N. Sea Investment

- UK Govt Raises Field Allowance for N. Sea Investment

Tuesday, July 05, 2011
HM Treasury

The Government announced that the annual rate of the Ring Fence Expenditure Supplement (RFES) for the North Sea fiscal regime will be increased from 6% to 10%, following discussions with industry initiated at the 2011 Budget. This provides extra support for investment in the North Sea, including in marginal fields that qualify for the current field allowance, and will also support the ongoing considerations on new categories of field allowance.

In the Budget, as part of a package of measures to help motorists cope with high petrol prices, the Government announced a Fair Fuel Stabilizer that would be funded by higher taxation of the profits from oil and gas companies when oil prices are high. The Government said at that time that it would consider with the oil and gas industry the case for a new category of field that would qualify for field allowance to support investment in marginal fields.

In the course of those discussions with industry, the Government has identified that the ability of a company to benefit fully from the field allowance is dependent on whether a company has sufficient current taxable income against which to off-set expenditure. This is addressed to some extent by the Ring Fence Expenditure Supplement, which currently allows companies with insufficient taxable income to uprate losses by 6% for six accounting periods.

The increase to 10% announced today will help ensure existing field allowances work more effectively and equitably to support investment in marginal fields. It also brings RFES in line with the discount rate typically used by the sector.

The Government will continue to engage with oil and gas companies on the case for new categories of field qualifying for field allowance.

Justine Greening, Economic Secretary to the Treasury, said, "The Government was clear at the Budget that it would engage with oil and gas companies, including to consider the case for further support for marginal projects. Today's change demonstrates our commitment to ensure current allowances work effectively and equitably, and lays the groundwork for further constructive discussions on field allowances."

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Husky Raises $1.2B to Boost Growth Strategy

- Husky Raises $1.2B to Boost Growth Strategy

Thursday, June 23, 2011
Husky Energy Inc.

Husky will raise approximately $1.2 billion offering of common shares by way of a bought deal (the "Public Offering") and a concurrent private placement of common shares (the "Private Placement") to its principal shareholders, L.F. Investments (Barbados) Limited, and Hutchison Whampoa Luxembourg Holdings S.a.r.l.

The Company has entered into an agreement with a syndicate of underwriters, led by RBC Capital Markets, Goldman Sachs Canada Inc., HSBC Securities (Canada) Inc., and J.P. Morgan Securities Canada Inc. (the "Underwriters") under which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 36,968,500 common shares in the capital of Husky (the "Common Shares"), at a price of $27.05 per Common Share resulting in aggregate gross proceeds of $1 billion. The Public Offering is made pursuant to a prospectus supplement to the Company's universal base shelf prospectus filed November 26, 2010 with the securities regulatory authorities in all provinces of Canada and to the Company's universal base shelf prospectus filed June 13, 2011, with the U.S. Securities and Exchange Commission ("SEC").

Pursuant to the Private Placement, the principal shareholders L.F. Investments (Barbados) Limited and Hutchison Whampoa Luxembourg Holdings S.a.r.l. will subscribe for a combined total of $200 million in Common Shares (a total of 7,393,714 Common Shares) on a private placement basis at the same price as the Public Offering.

The Company continues to execute on its strategic initiatives to accelerate near-term production and reserve growth. Husky expects production for 2011 to be towards the higher end of its previously announced guidance range.

The Public Offering and Private Placement is a key strategic element of the Company's proactive financing plan announced in November 2010 and will provide additional financial flexibility to advance its growth strategy. Proceeds will be used to accelerate exploration and development of the Company's emerging oil and gas resource portfolio and the continued development of its growth pillars in the Oil Sands, South East Asia and the Atlantic Region, including the Liwan Gas Project offshore China and Phase 2 of the Sunrise Energy Project in the oil sands of northern Alberta.

With the additional capital raised, the Company projects that production for the 2011 to 2015 time frame will be towards the high end of previous guidance of three to five percent average annual growth and is expected to be sustained at three to five percent average annual growth through to 2021. It is also anticipated an annual reserves replacement ratio of 140 percent will be achieved through the same period.

The Public Offering and Private Placement are expected to close on or around June 29, 2011 and are subject to customary closing conditions, including the approval for listing of the additional Common Shares on the TSX.

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Wintershall Raises Stake in Maria Discovery

- Wintershall Raises Stake in Maria Discovery

Thursday, May 26, 2011
Wintershall Norge ASA

Wintershall has once again stepped up its activities in Norway by raising the company's share in the Maria discovery to 50 percent, the company announced. The discovery is one of the largest oil discoveries in Norway in recent years and is situated around 200 kilometers off the coast of Trondheim. Agreements to this effect have been signed between Wintershall Norge ASA and Spring Energy AS and between Wintershall Norge ASA and Concedo ASA. According to the agreements, Wintershall will acquire a 15 percent share from Spring Energy and a 10 percent share from Concedo in the Maria discovery. With this acquisition, the BASF subsidiary Wintershall is increasing its shares in the licenses PL 475 BS, PL 475 CS and PL 475. Wintershall is the operator of the discovery and is driving forward the development of the discovery. The discovery is estimated to have from 60 to 120 million barrels of recoverable oil and 2 to 5 billion standard cubic meters (sm3) of recoverable gas. Wintershall is planning to drill an appraisal well before the end of the year to lay down an optimal development concept for the Maria discovery. Wintershall Norge ASA is now one of the largest license-holders in Norway with over 40 licenses of which it holds the operatorship in about 20.

Investments in the optimal development

"The increase in our share of the Maria discovery fits in perfectly with our long-term strategy to become one of the most important producing operators on the Norwegian continental shelf," Martin Bachmann, Member of the Wintershall Board of Executive Directors and responsible for Exploration and Production, explained. "By increasing its working interest, Wintershall is not only underlining its readiness to invest in Norway, it also shows the confidence we have in this project," the Wintershall Board Member emphasized. "Once we have carefully examined the development options, we will vigorously pursue the development of the discovery," Bachmann said. "The transaction reflects our strong commitment to make Norway a core region for Wintershall. At the same time we are moving our successful exploration portfolio towards development and production," Bernd Schrimpf, Managing Director of Wintershall Norge ASA, added.

The Maria discovery

The Maria exploration well discovered hydrocarbons in the summer of 2010 after Wintershall was awarded the production licenses PL 475 BS and PL 475 CS in the APA 2008 and APA 2010 licensing rounds. The Maria discovery in the Garn formation is located in a large horst area from the Jurassic period stretching from the northeast to the south-west. The Garn formation provides a reservoir for several fields in central Norway.

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