So who wants to be a Tekoil analyst? Certainly not me!, but while in the process of closing our Galveston Bay acquisition, ENI, a major Italian oil and gas player announced a very large deal with Dominion Resources, which as reported by Raymond James & Associates Equity Research Department, has potentially placed a premium on oil and gas assets throughout the Gulf of Mexico.

In what is the largest E&P deal year-to-date in North America, Dominion announced that it was selling its Gulf of Mexico properties to Italian oil major ENI for $4.76 billion. This transaction was part of Dominion’s ongoing E&P divestiture program. Proved reserves being sold were estimated at 967 Bcfe (billion cubic feet equivalent), implying a reserve valuation of $4.92 per Mcfe (1,000 cubic feet equivalent). This price is notably high relative to current valuation multiples of publicly traded Gulf of Mexico-focused producers, which are generally between $3.00 and $4.00 per Mcfe. For example:

In addition to the sheer size and bullish valuation of the ENI deal, we also see the possibility of a broader strategic significance to this transaction for Tekoil. To further expand on that thought and in an effort to put things in perspective, the $50 million purchase price that Tekoil paid for its circa 80 Bcfe of privately held Gulf of Mexico proved oil and gas reserves, represents just $0.625 per Mcfe compared to ENI’s $4.93 per Mcfe, and the cash portion of Tekoil’s deal only represents $0.375 per Mcfe, less than 1/12th of the ENI deal?

So given its much smaller size and for Tekoil to approximate its public company reserve valuation, one could assume that by using the most conservative valuation multiple for Gulf of Mexico reserves i.e. $3 per Mcfe, that Tekoil’s proven reserves of approximately 80 Bcfe could be valued in the public markets as high as $240 million? That is potentially very exciting news for Tekoil and its shareholders, especially as the ENI transaction should also be seen as a bullish catalyst for Gulf of Mexico producers and perspective buyers across the board. It is also worth noting that Tekoil’s present ‘enterprise value’ is under $100 million, and falls far short of its potential public company value, if based upon the types of reserve multiples contemplated above.

So the question is; are we comparing “apples with apples”? Well, given that Tekoil’s and ENI’s proven reserves are both Gulf Of Mexico, prolific, multiple stacked sand-stone type reservoirs (Frio and Miocene for Tekoil), with Tekoil’s reserve depth ranging from 3,000 to 13,000 feet, it would appear on the surface that we are indeed comparing similar reserve profiles.

Having said that, reserves are not the only consideration; ENI is a much more mature company than Tekoil, the Dominion reserves have extremely high production rates, and the sheer cost and present value of their deep water hard assets all serve to create a higher acquisition profile for this particular acquisition. However, from Tekoil’s perspective, reserves, production rates and potential for development are the most important factors, not how much it cost to develop and operate in a given environment. In fact Tekoil’s assets are located in the Bay of Galveston and include transportation and gathering station infrastructure, whereby ENI’s are in true deep water offshore, resulting in much higher operating and lifting costs, and potentially greater risk.

The nature of the buyers in recent Gulf of Mexico transactions has varied greatly, showing that interest in these assets comes from many types of operators, including U.S. E&P companies (both public and private), overseas oil and gas companies (both independent and integrated), and service companies. This particular ENI deal is an excellent example of a Gulf of Mexico acquisition by an international company, indeed quite possibly the largest ever. Other recent foreign buyers of Gulf of Mexico assets have included Japan’s Marubeni, Nippon Oil and Mitsui & Co., Spain’s Repsol YPF, and Norway’s Statoil and Norsk Hydro, though none of these transactions approached $5 billion.

In some ways the current geopolitical climate also dictates that assets located in safe political environments are in high demand and fetching top dollar, with many of the major oil and gas companies under pressure to replace dwindling reserves in politically friendly environments.

The Gulf of Mexico represents a mature hydrocarbon province with short reserve lives (typically from 6 to 10 years, and in the case of the ENI assets, only 5.3 years because of prolific production rates). Given that Gulf of Mexico pure-plays tend to trade at very low EBITDA and EPS multiples, they often represent highly attractive value opportunities for potential acquirers. More fundamentally, Gulf of Mexico operations also provide very rapid payout rates and excellent free cash-flow generation. And while there is no disputing that the Gulf of Mexico is maturing, there are plenty of growth opportunities, such as the assets acquired by Tekoil.

With approximately 11% of our proven reserves currently in production, 89% are available for Tekoil’s future production growth. Approximately 19% are already “behind pipe” (38 PDNP’s), and because they are reserves that are part of existing well-bores, they are planned to be brought on-stream via an ongoing work-over program using our own work-over rig. Approximately 70% of the reserves are proved undeveloped (64 PUD’s), and are planned to be brought on-stream by drilling and completing new wells following a carefully planned 3D seismic evaluation.

So Tekoil’s acquisition is an excellent example of the type of growth opportunities that exist in and around the Gulf of Mexico, and although this is a very simplified analysis, it should provide a reasonable indication of typical public company valuation profiles for Gulf of Mexico assets.

On a slightly different subject, I was doing some research recently on the Dow Jones US Exploration & Production Index, and was surprised to see that Tekoil & Gas Corporation had been listed in the top ten best performing stocks in several categories during the past 12 months, and in fact was currently (05/18/2007) rated second during the prior 12 month period. That may be a little misleading in my opinion, because prior to our recent acquisition our share price had no basis, but it was nice to be recognized, especially now that our first acquisition is behind us and we have assets with measurable potential.

And finally, I would once again like to thank each and every one of our shareholders for your continued support, and would encourage you to tune into the Tekblog and the rest of our website for continued updates, as I believe we have very exciting times ahead of us and look forward to sharing them with you.