Oasis’ deal to buy Forge Energy acreage will test the market’s confidence after a year in which some companies felt investors’ wrath—in the form of falling stock prices—after Permian acquisitions.
[Editor’s note: This is a developing story. It as last updated at 10 a.m.]
After a long lean streak of Permian Basin A&D, Oasis Petroleum Inc. (NYSE: OAS) agreed to buy 20,300 net Delaware Basin acres from Forge Energy LLC, a Dec. 11 news release said.
Oasis said it will pay Forge with $483 million cash and 46 million shares for a total value of $946 million—making it the largest publicly announced deal in the Permian since at least late March.
The acquisition will add 507 net locations in multiple horizons in the Wolfcamp and Bone Spring formations. Production gained by the deal includes an average 3,500 barrels of oil equivalent per day (boe/d). Based on November strip pricing, the assets proved developed producing value is about $170 million.
The price point assumes production is worth about $48,570 per flowing boe/d and that Oasis will pay more than $38,200 per acre—one of the higher values paid in 2017.
Some of the deal’s funding may require Oasis to use its revolving credit facility or test capital markets. Oasis said Dec. 11 it has commenced a public offering of 32 million shares of common stock for gross proceeds of about $305.6 million.
To offset acquisition costs, Oasis said it expects to divest noncore Williston Basin acreage next year for up to $500 million. Wells Fargo said Dec. 8 that the company’s performance in the Bakken trails other E&Ps listed in Standard & Poor's Supercomposite Oil & Gas Exploration & Production Index.
Tommy Nusz, Oasis’ chairman and CEO, said the Forge acquisition is accretive and more than doubles its core net inventory in the Permian.
The deal represents a “unique opportunity to acquire a highly complementary asset to Oasis's premier Williston Basin acreage that positions the company to further capitalize on its operational strength,” he said.
The new Permian assets will create a consolidated position in the deepest and highest pressured part of the Delaware in the heart of the oil window, he said. Forge’s acreage consists of largely contiguous acreage blocks that can accommodate laterals of about 8,000 ft.
The position has been “materially de-risked” through well performance by Forge and offset operators in Wolfcamp and Bone Spring formations. The deal also improves Oasis’ capital efficiency in its development program, “while providing an opportunity to divest and realize value for quality assets that fall deeper in our development program.”
Investors have generally disfavored Permian acquisitions made earlier this year while rewarding companies with strong balance sheets. In the largest deal since March, QEP Resources Inc. (NYSE: QEP) said it would pay $732 million for Midland Basin acreage. In July, a day after announcing the deal, QEP share prices fell 14%.
However, Oasis sees the deal reducing its capex and strengthening its balance sheet. Bucking estimates, Nusz said that the company expects to be free-cash-flow positive in 2018 at West Texas Intermediate prices of $55 per barrel. Oasis was forecast to outspend by about $122 million in 2017 and $22 million in 2018, Wells Fargo Securities forecast in December.
The company is also on track to reduce its leverage to 3.7x from 4.6x by the end of 2017. Oasis said the deal is accretive to per-share NAV, long-term cash flow and the balance sheet. As of Nov. 30, the company had $333 million drawn and $10.5 million in letters of credit outstanding under its $1.6 billion borrowing base and $2.1 million in cash.
Oasis expects to drill 16 to 20 gross wells and complete six to eight gross wells with a $100 million capital program in 2018. Initially, the company will run a single rig and may add another in second-half 2018.
Vinson & Elkins advised Oasis Petroleum Inc. on its purchase and sale agreement with Forge and also advised Oasis on its public offering.
The acquisition has an effective date of Dec. 1 and is expected to close in February.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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