Oligarch’s Oil Deal Gives Green Light to Drill in Mexico

(Bloomberg) -- Russian billionaire Mikhail Fridman’s oil firm has agreed to buy one of the first companies to drill in Mexico after it opened to foreign investment, gaining a large tranche of exploration acreage in the country.

Fridman, via his DEA Deutsche Erdoel AG unit, is buying Sierra Oil & Gas from a group of private-equity owners, according to a statement from the company. DEA didn’t disclose financial terms, but a person familiar with the negotiations put the value of the deal at around $500 million.

The transaction, which is set to become the largest upstream acquisition in Mexico since the liberalization of its petroleum sector in 2013, signals that energy groups remain interested despite the left-wing policies planned by new President Andres Manuel Lopez Obrador.

“We are making a big commitment to Mexico,” John Browne, the former boss of BP Plc who now oversees DEA, said in a phone interview. The country’s state oil company “has done a good job, but it is still an underdeveloped part of the world. It’s a brand new play.”

Sierra, which has backing from EnCap Investment LP, Riverstone Holdings and BlackRock Inc., holds a 40 percent share of the Zama field, one of the largest shallow-water discoveries in the past 20 years globally. It’s estimated to hold 400 million to 800 million barrels of oil equivalent in recoverable volumes and could start production as early as 2022, according to the statement.

The acquisition marks another step in Fridman’s work to create a large independent oil and gas company. He set up a firm called LetterOne with partner German Khan in 2013 to invest part of the $14 billion they got from selling a stake in TNK-BP, a Russian joint venture with BP.

“In a way, the deal is really less a surprise - DEA is in growth-mode and keen to build more material exposure in Mexico,” Maria Cortez, Latin America upstream senior research manager for Wood Mackenzie Ltd., said by email. “With uncertainty around licensing rounds, they have shopped the secondary market.”

LetterOne’s unit L1 Energy, which is chaired by Browne, took control of DEA, a Germany-based oil and gas group, in 2015. Last year, Fridman agreed to merge DEA with Wintershall AG, the oil and gas unit of German chemical giant BASF SE.

The Wintershall deal, which is expected to close next year, will create the largest independent oil and gas producer in Europe. The company is mulling an initial public offering as soon as possible, Browne said in an interview in September. The two companies have assets across South America, Europe and North Africa.

Browne said the combined company will invest another $1 billion in Mexico and make further transactions, without going into more detail.

When the sale of Sierra closes, DEA will have interests in one onshore production block and 10 exploration blocks, including Zama. The transaction is subject to government approvals and is expected to close in the first half of 2019.

--With assistance from Amy Stillman.

To contact the reporters on this story: Javier Blas in London at jblas3@bloomberg.net;Kelly Gilblom in London at kgilblom@bloomberg.net

To contact the editors responsible for this story: James Herron at jherron9@bloomberg.net, Helen Robertson, Christopher Sell

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