A&D Watch

ASSEMBLY REQUIRED: VETERAN OILMEN PIECE TOGETHER DELAWARE DEAL

For E&P companies, the Permian continues to be the basin in the bubble, largely isolated from the industry downturn that is filling ledgers in other plays with red ink.

While Luxe Energy LLC’s hunt took it across Texas in search of acreage, it was the relative infancy of the Del­aware Basin’s development and the opportunity it presented that ultimately pushed the company to make a deal.

Deals elsewhere have stalled, but the Delaware’s prices have remained consistent with 2014 metrics. That made finding an entry point challenging for the company even in the down market.

“Right now it’s so competitive in the Delaware Basin, it’s difficult to get a transaction done,” Lance Langford, Luxe’s CEO and president, told Oil and Gas Investor.

The competition didn’t intimidate industry veteran Langford and his team, however. Luxe Energy closed its first acquisition of roughly 18,000 net acres in the Delaware’s core after several months of negotiations. The deal includes room for midstream assets, though acreage development will be on hold until prices start to look up.

Delaware surprise

Langford, who grew up in Midland, Texas, said Luxe came across two packages in the Delaware Basin that were imperfect—until pieced together.

What he saw was a basin a bit behind operationally compared to the rest of the industry. With the hope of bringing their “best-in-class technologies” to West Texas, Langford and his team began making offers.

The two tracts they found appealing didn’t appear strong enough on their own. But combined, the acreage formed a contiguous block that would benefit the company’s land management and its need for future midstream activities.

Langford’s eye was also drawn to the geology and well performance on the acreage. The wells, he said, are providing some of the best economics in the Delaware and continue to improve.

Even though both packages had several other interested buyers, Luxe managed to close the transactions quickly. This was was a surprise to Langford, who expected Luxe’s first deal to stretch on for a year to a year and a half.

“We basically came to a price decision six months after starting Luxe, but it wasn’t that long when we were negotiating with the companies,” he said.

By Jan. 21, the company completed the transactions and acquired undeveloped acreage and producing properties in Reeves and Ward coun­ties, Texas.

The deals, which had undisclosed values, were with Endea­vor Energy Resources LP and Finley Resources Inc.

“We are fortunate that we found an area that we like, got a little ahead of the curve and made two transactions,” Langford said.

Luxe’s Delaware acreage is contiguous and mostly HBP with about 1,000 boe/d of current net production. The properties are majority operated with a high average working interest. The company will also have the opportunity to design, construct and operate midstream infrastructure.

Luxe plans on waiting for oil prices to recover to launch development, which Langford believes will happen by at least early 2017. When that happens Luxe will be ready to start mass producing wells, he added.

“I’m not saying we’re going to turn it on at $50 a barrel and turn it off at $30, but we’ll constantly assess what the oil price [needs to be] for our economics and decide when we want to accelerate and create more value,” he said.

Until then, Luxe will spend its time building development plans and preparing its acreage. The company also will continue to identify, evaluate and acquire additional growth opportunities.

“We know that we have built a base here and might have to add on another operational base somewhere else in the Delaware Basin—or maybe in another basin,” he said.

Path to Permian

For Langford, his involvement in Luxe is a dream come true. The Austin, Texas-based company was formed in May 2015 following private-equity firm Natural Gas Partners’ commitment of $500 million to Langford and his management team.

At the time, Luxe’s founders, Langford and COO Jeff Larson, were searching for an opening in an oily basin where they could apply their experience with horizontal drilling and multistage fracking developed in the Bakken.

Langford and Larson have worked together for several decades. The pair started at Burlington Resources Inc. and most recently worked at Statoil ASA. Prior to Statoil, Langford and Larson were responsible for Brigham Exploration Co.’s entry into the Bakken Shale.

In 2011, Brigham was acquired by Statoil for about $4.4 billion.

The duo spent about three years at Statoil in the Bakken, with Langford as senior vice president of engineering and Larson as vice president of exploration.

However, with Luxe, Langford and Larson were considering bringing their talents to the Scoop/Stack, Eagle Ford and Permian Basin.

The Permian provided the best opportunity for the pair to use their knowledge, Langford said.

“I was kind of at that place in my career that I needed to decide if I was going to work for somebody else or start a company,” he said.

When commodity prices headed south, Langford saw his window of opportunity open.

“I felt like that was an opportunity for me to go and try to raise private-equity money, get support and then grow something counter-cyclical from the markets, and that’s what I’ve been doing,” he said.

For the time being, Langford and Larson will remain away from the Bakken. After leaving Statoil, the pair signed a noncompete agreement for one year.

“Don’t be surprised to see us come back in the future, but right now we’re staying out of the Bakken,” Langford said.

AWE EXITS EAGLE FORD AFTER SUGARLOAF RESERVE INCREASE

After marketing its Eagle Ford assets since November, Australia-based AWE Ltd. has found a buyer for its 10% working interest in the Sugarloaf area of mutual interest. Private Houston-based Carrier Energy Partners II LLC, a Riverstone-backed company led by Mark Clemens, has agreed to purchase the interest in Karnes County, Texas, for US$190 million.

The sale comes just months after Australia’s AWE said its Sugarloaf 1P and 2P reserves increased in July. Proved reserves alone jumped by 48% to 19.4 MMboe. In fiscal year 2014-2015, Sugarloaf production increased 54%, the company said in November.

Marketing materials said that AWE was offering interests in 2,400 net acres operated by Marathon Oil Corp. in the condensate window of the Eagle Ford. AWE had about 260 gross proved developed producing wells generating 4,500 boe/d, 71% liquids. About 1,500 gross potential locations were remaining.

The sale proceeds will be used to repay debt drawn under the AWE’s debt facility and will “substantially strengthen the company’s balance sheet,” leaving it in a net cash position of US$42.2 million (AU$60 million).

The agreement has an effective date of Jan. 1, 2016, and is subject to purchase price adjustments at closing, including a payment to AWE of about $9 million (AU$13 million) for drilling costs incurred prior to the effective date. The company’s strategy is to divest assets in order to recycle capital into ground-floor developments, such as the Waitsia gas project in Western Australia, said Bruce Clement, AWE managing director and CEO.

“The sale of the Sugarloaf asset for AU$271 million is an excellent outcome for AWE and demonstrates the company’s proactive approach to portfolio management and its ability to consistently deliver significant value, even in a low oil price environment,” he said.

“Sugarloaf has been a valuable growth project for AWE because it is located in the sweet spot for condensate production from the Eagle Ford Shale formation in Texas,” he said. “We acquired full control of the 10% Sugarloaf interest in 2010, having recognized the potential value of the acreage.”

AWE was advised by UBS Investment Bank.

Additionally, Carrier plans to pick up the 3% interest owned in Surgarloaf by Empyrean Energy Plc for up to US$71.5 million. Carrier will pay $61.5 million in cash, with an additional $10 million contingent upon the price of oil.

Average daily production net to Empyrean’s interest after royalties from the Sugarloaf AMI Project during the fourth quarter was 1,250 boe. Macquarie Capital is adviser to Empyrean.

MARKETPLACE CHATTER

Choices, Choices. With ­depressed prices settling in, asset sales in 2016 may start to get moving. Craig Lande, managing ­director, RBC Richardson Barr, said he expects large companies to do some of the asset moving. Among candidates, he said companies such as Royal Dutch Shell, bigger independents such as Devon ­Energy Corp. and MLPs including Vanguard Natural Resources are likely to shed assets in 2016.

Fewer Assets, Fewer Hedges. EOG Resources is said to have 149,000 of its Barnett Shale acres on the market. Recall that EOG marketed acreage in 2015 in the Midcontinent, Upper Gulf Coast ­region, Canada and the Rocky Mountains with proceeds through the first nine months of $91 million. EOG has no hedges on its production for 2016.

Warming to M&A. While wide bid/ask spreads have kept trans­actions relatively low in recent months, M&A opportunities could be heating up, SunTrust Robinson Humphrey analyst Neal Dingmann forecast.

“Our channel checks indicate deal traffic could soon increase if prices slightly stabilize. The first areas where we would expect deals would be in the Permian, Stack, Eagle Ford and perhaps even the ­Appalachian.

“What many investors seem to have wrong is that, while commodity prices and many E&P stocks have fallen materially, we have not seen a similar decline for various acreage/minerals.”

Eagle Ford stockpiling. Seaport Global analyst Mike Kelly likes the performance of Lone Star Resources’ Horned Frog play, and projects ­management to defend IRRs of 25% to 45% at current strip. That only ­suggests the Eagle Ford player might want more.

“On the M&A front, Lone Star continues to scoop up smaller Eagle Ford positions on the cheap, and we think it is eyeing larger packages held by several major operators in the play,” said Kelly.

“In addition, management has seen strong interest from ­potential ­financial JV partners that are ­interested in having [the company] ­assume operatorship in a potential partnership.”

What’s The Hold Up? ­Bonanza Creek’s $255 million ­divestiture of its Rocky Mountain Infrastructure has been delayed as Riverstone Holdings LLC-backed buyer Meritage Midstream and ­Bonanza Creek work out some kinks in the deal.

The companies have mutually agreed to extend the closing date for the transaction by about a month, expected to have closed by end of February, Raymond James reported.

“No specific reason was given for the delay, but management noted that both parties have been working diligently on the complicated agreements necessary to transfer the assets.”

Alternative Alternatives. Clayton Williams Energy Inc. ­confirmed on Jan. 20 that the ­review of strategic alternatives to enhance shareholder value are ­ongoing, and that transactions could be part of the review. The board of directors retained Goldman Sachs as its financial adviser.

The transactions disclosed on Jan. 18 were not associated with the ongoing strategic review.

CONCHO FORTIFIES DELAWARE CORE IN TRIPLE PLAY

Concho Resources Inc. bought, sold and swapped in three separate transactions to prop up its holdings in the southern Delaware Basin and reduce net debt. Overall, the deals add to Concho’s core in the Delaware and contribute 350 drilling locations—about 200 long-lateral locations in the company’s Southern Delaware.

In the first deal, Midland-based Concho plans to acquire 12,000 net acres in Reeves and Ward counties, Texas, from Jetta Operating Co. Inc. The acreage is adjacent to the company’s North Harpoon prospect and will cost about $360 million, including 2.2 million shares of Concho common stock, $150 million in cash and $40 million to carry a portion of the seller’s future drilling costs.

Simmons & Co. International analyst Pearce Hammond estimated the deal metrics at $15,000 per acre. “The acquired assets appear to be high-quality core acreage situated along the Pecos River. The seller will retain a 20% working interest in the wells,” he said.

Concho also sold about 14,000 net acres in Loving County, Texas, to Silver Hill Energy Partners II LLC for $290 million, with the deal structured as a like-kind exchange. Dallas-based Silver Hill is a Kayne Anderson-backed company led by Kyle D. Miller. Concho said the divestiture eliminates about $100 million of lower rate-of-return obligation drilling in 2016.

David Tameron, senior analyst with Wells Fargo Securities, values the deal at $13,600 per acre.

In a third deal, Concho traded with Clayton Williams Energy Inc. to consolidate 21,000 net nonoperated acres into a concentrated, operated position adjacent to the company’s Big Chief prospect in Reeves. Concho’s exchange with Clayton Williams consolidates operated positions and allows Concho to implement longer laterals.

Substantially all of the acreage was associated with a farm-out agreement between the company and Chesapeake Energy Corp., in which Clayton Williams earned a 75% interest in certain leases and Concho acquired the remaining 25% of the leases. As a result of the exchange, Clayton Williams acquired Concho’s 25% working interest in certain leases and Clayton Williams conveyed its 75% working interest in certain leases to Concho.

The company’s acreage position remains at about 65,000 net acres, but its working interest increased to 100% throughout most of its largely contiguous acreage block.

Scotia Waterous was financial advisor to Concho on the acreage divestiture. Vinson & Elkins LLP was legal advisor to Concho on the property acquisition and the acreage divestiture.

SANDRIDGE GIVES AWAY PINON TO BUST OXY DEAL

Troubled SandRidge Energy Inc., leaching money and stock market credibility, found an escape clause in a contract it no longer wanted: give away midstream and producing assets.

The company also converted its entire borrowing base to cash on Jan. 22.

SandRidge delisted from the New York Stock Exchange on Jan. 7. Some observers had speculated that the company’s hiring of a financial adviser might mean bankruptcy, though it is unclear if that path is one the company is willing to take. The company now has a cash balance of $885 million.

On Jan. 21, SandRidge essentially abandoned its E&P assets in Piñon Field along with midstream assets, plus $11 million, to Occidental Petroleum Corp. to settle claims from a 30-year agreement for removal of CO₂ produced in West Texas.

The company also borrowed $488.9 million on the advice of financial adviser Houlihan Lokey Inc. and legal adviser Kirkland & Ellis LLP. The funds will be used for general corporate purposes, SandRidge said.

SandRidge settled all claims arising out of an agreement to transport CO₂ from natural gas volumes produced by the company in Piñon Field. The E&P assets, which were 99% gas, represented about 6% of the company’s total production and 17% of its total lease operating expense in the third quarter of 2015.

As of year-end 2015, the assets included 24,598 Mboe of proved reserves with a present value of approximately $13.3 million based on SEC pricing. Midstream assets comprised 370 miles of gathering lines acquired from a third party in fourth-quarter 2015, 100 miles of CO₂ pipelines and other related pipeline and processing infrastructure. The agreement also includes the transfer of seismic data covering more than 1,300 square miles of the West Texas Overthrust region (WTO) and other properties in the WTO region.

The transaction is expected to lower the company’s operating expenses by about $39 million in 2016.

“In this transaction we are eliminating a significant liability while also improving our annual cash flows, both of which are consistent with our stated business objectives,” said James Bennett, Sand­Ridge president and CEO. “With significantly lower operating expenses, we can move forward with renewed attention to the development of our Midcontinent and Niobrara assets.”

SandRidge’s agreement with Occidental required it to deliver a total of about 3,200 Bcf of CO₂ over the entire 30-year agreement period. However, SandRidge was coming up far short of its agreement. Through December 2014, SandRidge had delivered about 300 Bcf less than the minimum annual requirements, with accrued penalties of about $75 million.

For 2015, SandRidge projected that natural gas production levels would mean accruing up to $38 million related for volume shortfalls, with a potential of $210 million owed in 2041, SandRidge said.

Despite its financial concerns, the company has continued to make deals in the downturn. In December, SandRidge purchased Niobrara Shale oil assets in the North Park Basin in Colorado for about $190 million cash.

QUICKSILVER'S HALF-CENTURY RUN ENDS IN BANKRUPTCY

Quicksilver Resources Inc., in bankruptcy since March 2015, has auctioned its U.S. oil and gas assets in the Barnett Shale and its Delaware Basin assets in Pecos, Crockett and Upton counties in Texas for an all-cash bid of $245 million from BlueStone Natural Resources II LLC.

The Quicksilver assets include over 1,000 operating wells in the Barnett Shale play.

The Fort Worth-based company’s West Texas assets include about 200 million barrels of resource potential and encouraging well results, Quicksilver said in September.

By debt, Quicksilver was the third largest E&P bankruptcy of 2015 with about $2.1 billion in secured and unsecured debt, according to analysis of data collected by Haynes and Boone LLP. Quicksilver was the fifth company to file for bankruptcy out of what eventually became 42 cases.

Glenn Darden, president and CEO of Quicksilver, said the marketing and sales process was thorough and resulted in a successful outcome. “This sale maximizes value for the benefit of our creditors in the face of difficult market condition,” he said.

BlueStone II president and CEO John Redmond said, “We saw the Quicksilver asset purchase as an ideal way to advance our growth strategy in Texas. These assets are a great fit for us—high quality wells in a clearly defined resource play.”Bluestone, headquartered in Tulsa, Okla., is backed by Natural Gas Partners.

In the past 15 years, Quicksilver’s largest transaction was its 2008 acquisition of 13,000 net acres in the Barnett Shale for $1.3 billion. In May 2014, the company and other sellers divested 312,000 net acres in the Niobrara Shale in northwest Colorado for $180 million.

Including operations in Canada, Quicksilver’s holdings consisted of 580,000 net acres, proved reserves of 1.2 Tcfe and 2,000 net producing wells.

The assets of Quicksilver’s Canadian subsidiaries were not included in the sale, and a separate marketing process for those assets is underway.

BAKKEN BUBBLE? ANOTHER WILLISTON BASIN DEAL MATERIALIZES

NP Resources LLC has acquired nearly 90,000 net acres in the Williston Basin in Billings, Golden Valley and McKenzie counties, N.D.

NP Resources, a venture between Denver’s NPR Management Holdings LLC and Vortus Investment Advisors of Fort Worth, Texas, did not disclose the seller or the value of transaction. However, Dec. 23 SEC filings show that a limited partnership called Vortus-NPR Co-Investment raised $33.3 million as part of a “merger, acquisition or exchange offer.” The company’s address is the same as Vortus Investment Advisors.

The deal is the second in the Williston Basin since the New Year. Samson Oil & Gas Ltd. said Jan. 5 its subsidiary has agreed to acquire Williston Basin properties.

NPR’s acquisition includes production from the Bakken/Three Forks as well as 53 operated and seven nonoperated wells with an 85% average net revenue interest.

NP Resources is a newly formed company organized and managed by the principals, founders and management of North Plains Energy LLC and Vortus.

Steve Mercer, CEO of NPR, said the acquisition is the group’s latest in the current low price environment and provides NPR the opportunity to bring the latest enhanced horizontal drilling and completion techniques to as relatively undeveloped area of the Williston.

“The held-by-production nature of the assets will give us time to organize a well-planned development program that maximizes the return on invested capital as the industry evolves,” Mercer said.

Clayton Miller, president and COO, said the acquisition will build on the company’s successful model of efficient drilling and production operations in North Dakota to deliver top-tier development and lifting costs.

NPR Management Holdings is a privately held company formed by the founders, principals and management of North Plains Energy. North Plain’s history dates back to 2007 where it set about to acquire and develop 60,000 net acres in Williams, McKenzie, Divide, and Dunn counties, N.D., in the early stages of development and de-risking the western side of the Nesson Anticline.

NPE sold its prior joint venture holdings and wholly owned leasehold including production and net undeveloped acreage in 2012 for more than $700 million.

NP Resources is now capitalized and positioned to seek out off market opportunities that it sees as having considerable economic upside with a nominal increase in oil prices during this current price environment.

Vortus Investments was founded by Jeffrey W. Miller and Brian C. Crumley. The energy private equity firm focuses on partnering with successful owner/operators to provide development capital in the lower middle market onshore U.S. upstream sector. NP Resources is Vortus’ fourth investment in the upstream sector and its first investment in the Williston.