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Mariner Energy's Deepwater Assets A Potential Upside

Posted: Jan 16, 2009 13:26 PM by Eric Fox

Tickers in this Article: MUR, FST, ME

Mariner Energy (NYSE:ME) has a stable base of assets in a reliable onshore oil basin, while holding prospective exploration blocks in the deepwater and shelf areas of the Gulf of Mexico. The stable cash flow from its core assets and potential upside from its offshore assets make Mariner an interesting play in the energy space.

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Mariner is an oil and gas exploration and production company focused on the deepwater and shelf areas of the Gulf of Mexico, and the Permian Basin of Texas. The company had 836 Bcfe (billion cubic feet equivalent) of proven reserves on December 31, 2007, with approximately 54% natural gas. About 46% of reserves are in the Permian Basin with the balance in the offshore area. Mariner has grown reserves and production at a 52% and 39% compound annual growth rate, respectively, since 2004. (Looking to get a better understanding of this industry? Read the Oil And Gas Industry Primer.)

Permian Basin
The Permian Basin is one of the oldest producing areas in North America. Although 47% of Mariner's reserves are here, this basin only accounts for 10% of production. This may be due to the small size of the wells relative to offshore discoveries. The company stated it has more than 1,000 drilling locations on its 94,000 acres. These assets are stable cash flow providers for Mariner and will help the company during the downturn.

Deepwater Exploration
Mariner was awarded 28 blocks in recent lease sales and has more than 55 prospective deepwater sites to explore. The company is targeting large finds here, anywhere from 50 Bcfe to as much as 1 Tcfe (trillion cubic feet equivalent) of reserves.

Many smaller oil companies that are exploring offshore assets typically partner with larger companies to share the cost and offset the risk of the well. Mariner has one prospect in the deepwater area called the Dalmatian, which is targeting 50-150 Bcfe of gross natural gas reserves. Murphy Oil (NYSE:MUR) is the operator of the well, and Mariner has a 12.5% interest.

Shelf Area
Mariner acquired its shelf properties in March 2006 when Forest Oil (NYSE:FST) spun off its offshore assets into a separate subsidiary, which then merged with Mariner. The company is performing field studies on the properties and has identified 110 prospects.

Mariner is being careful in 2009 to cope with the downturn in energy and the fall in commodity prices. The company will spend $431 million in capital expenditures on exploration in 2009, compared to the $1.1 billion spent in 2008. The 2009 budget is based on oil prices of $55 per barrel and $6 per MMbtu (million British thermal units) for natural gas. Since current prices are below these levels, there may be more cutbacks in capital expenditures as the year progresses. Despite the size of the reduction in capital expenditures, the company still expects 20% production growth in 2009.

Financial Risks
Mariner's financial situation is a slight concern, as the company had only $11 million in cash and $910 million in long-term debt as of September 30. The company has two issues of senior notes, each $300 million, but they don’t mature until April 2013 and May 2017. The balance of the debt is a bank facility that expires January 2012. (Learn about the components of the statement of financial position and how they relate to each other in Reading The Balance Sheet.)

Bottom Line
Mariner Energy has stable cash flows from its assets in the Permian Basin in Texas, and potential upside from its extensive prospective blocks in the shelf and deepwater areas in the Gulf of Mexico. Financials are a concern, but it has no rollover risk on its debt for several years.

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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