Shuffling the Deck in Oil & Gas Exploration (EPL, MRO, CVX)

Yesterday a relatively small independent oil & gas firm, EPL Oil & Gas Inc. (NYSE: EPL) acquired three Gulf of Mexico fields from privately held HilCorp Energy GOM Holdings LLC for $550 million. EPL’s stock hit a new 52-week high on the acquisition, which is expected to double the company’s production to 20,000 barrels of oil equivalent per day.

Perhaps most interesting is what’s going on with the seller. Hilcorp is the third largest privately held U.S. oil company, behind only Hunt Oil and Koch Industries, and the sale to EPL marks Hilcorp’s final exit from the Gulf of Mexico. The company has turned its attention north, according to The Wall Street Journal — to Alaska.

In a previous transaction with Marathon Oil Corp. (NYSE: MRO) Hilcorp acquired reserves in Alaska’s Cook Inlet and stakes in natural gas storage and pipelines. The company also acquired producing fields in the region from Chevron Corp. (NYSE: CVX). The deal with Marathon is still being reviewed, but if approved Hilcorp will account for 60% to 80% of Alaska’s natural gas market according to the WSJ.

To pay for all this, the company has hired Bank of Montreal to assist in the sale of Hilcorp’s midstream properties in south Texas worth approximately $2 billion. The WSJ notes that some $5.1 billion in midstream assets have been acquired by private equity firms in the past few months, with a good deal of the buying in south Texas, and that several private equity firms are building war chests to make more midstream investments.

Midstream assets, including gathering systems, processing plants, and distribution companies, offer an attractive regulated rate of return of around 10%. Where else can investors make a guaranteed rate of return like that in this day and age? Midstream and pipeline assets are very valuable today, provided they’re in the right place.

South Texas is one of those “right places.” So are the Utica shale play in eastern Ohio, the Marcellus shale play in the Appalachians, and the Niobrara shale play in Colorado, Nebraska, and Wyoming. These are the up-and-comers and investments in midstream and pipeline assets serving these fields are attracting a lot of attention.

Paul Ausick