Stack Behemoth: Silver Run, Alta Mesa, Kingfisher Form $3.8 Billion Pure Play

Blank-check company Silver Run Acquisition Corp. II (NASDAQ: SRUNU) found its ‘pay to the order of’ in an ambitious merger linking Silver Run, Alta Mesa Holdings LP and Kingfisher Midstream LLC into the first publically traded Stack pure-play company.

Once merged, the trio of companies will take the name Alta Mesa Resources Inc. with a combined, estimated value of about $3.8 billion. The Kingfisher Midstream assets, which alleviate any concerns about takeaway capacity for the company, may eventually be monetized and spun out separately through an IPO to help pay for upstream development, the companies said.

The deal also represents a departure from other recent special-purpose acquisition companies (SPAC) that largely made moves in the Permian Basin.

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Silver Run II, headed by James T. Hackett who was formerly CEO of Anadarko Petroleum Corp. (NYSE: APC), will join forces with Alta Mesa, led by Hal Chappelle as president and CEO, to develop 120,000 contiguous net acres and 4,196 gross identified drilling locations. In March, Silver Run II’s IPO raised $1 billion, nearly all of which will go into the merger.

“The character of this team is we have major league players with relevant experience who’ve worked together for a considerable amount of time,” Chappelle said in an investor video a day after the deal was announced Aug. 16.

Alta Mesa estimates the PV-10 value of its identified drilling locations at about $7 billion before downspacing efforts. The value doesn’t include more possible locations the company acquired on about 20,000 acres in Major and Blaine counties, Okla., in July.

“We did make an acquisition about a month ago,” Chappelle said, adding the company’s acquired locations “represents some upside.”

Acquisitions are expected to be a drive for the new Alta Mesa, which sees itself as a potential consolidator in the Stack—particularly with Hackett as the new company’s executive chairman and Chappelle as CEO. Since 2013, Alta Mesa tripled its Stack footprint to 120,000 net acres from 40,000 acres.

“In the broader Stack area there is significant acreage that could be consolidated by [Alta Mesa],” Chappelle said. “We believe this combination with Jim [Hackett] positions us to compete effectively for good opportunities.”

When Worlds Collide

Hackett said the acquisition meets the criteria Silver Run II set out to acquire.

“We formed Silver Run II with the objective of acquiring low-breakeven, stacked-pay, oil-weighted assets, preferably with an integrated related midstream platform,” Hackett said. “The combination of Alta Mesa and Kingfisher is a perfect strategic match for our desired integrated platform.”

Alta Mesa’s inventory consists of oil-weighted resources with $25 per barrel breakevens and single-well rates of return greater than 85%, the company said. The acreage core is concentrated in northeastern Kingfisher County, Okla.

“It has everything we desired,” Hackett said.

Unlike most Stack players that have largely targeted the Meramec and to a lesser extent Woodford, Alta Mesa has primarily targeted the Osage. It also has plans to develop the Meramec, analysts with Capital One Securities said in an Aug. 17 report.

Valuing the acreage is difficult, the analysts said, “because you can drive a truck through implied, undeveloped acreage values, depending on how the midstream entity is valued.”

Generally, the firm said the acreage value likely falls between $7,000 and $16,000 per acre.

“For perspective, the high-water mark in Stack M&A was the Dec. 2015’s Devon Energy/Felix deal, which was valued at about $19,000 per acre,” the analysts said.

For Alta Mesa, the deal represents a “major deleveraging event,” said Mike McCabe, Alta Mesa CFO. The company will have zero net debt and “excellent pro format liquidity.”

Silver Run II will contribute $999 million cash to the merger. Riverstone Holdings LLC, which backs Silver Run, will also contribute $600 million cash. Kingfisher owners will receive $813 million. Another $786 million will address Alta Mesa’s balance sheet and provide capex funding.

Alta Mesa’s capex will increase to $349 million over its March spending announcement of $290 million, including acquisitions. About $108 million in capex will be funded by Alta Mesa Partners’ joint venture agreement with Bayou City.

McCabe said he expects positive cash flow from operations as early as 2019.

Good To Be The King

The Kingfisher Midstream assets give Alta Mesa a lock on takeaway capacity and possible constraints as the Stack is further developed. The company’s purpose-built system is able to handle larger volumes from multiple wells flowing back from pads, Chappelle said.

Kingfisher’s assets include 300 miles of pipeline, storage capacity and gas processing. A 200 million cubic feet per day cryogenic plant expansion is set to begin operations in fourth-quarter 2017.

Kingfisher has about 300,000 dedicated acres from Alta Mesa and five other third-party producers. The company is in the process of secure acreage dedications in the western part of the Stack play.

Alta Mesa’s recent acquisition will add about 20,000 dedicated acres in Major.

Chappelle said the infrastructure addresses concerns that have hampered other basins.

“For want of capital we would have built this ourselves a few years ago due to the growing functional constraints and inherent inefficiencies of older legacy processing and gathering,” he said, adding he was concerned “that this basin might experience periodic near-term limitations to residue gas takeaway, particularly to interstate markets.”

Zach Lee, CEO of Kingfisher operator and equity owner ARM Energy Holdings LLC, said the Stack play was identified early on as an area “in need of midstream infrastructure and proactively solved for a takeaway solution for its producer partners, chief among them Alta Mesa as one of the most active and successful drillers in the play.”

The transaction is subject to the approval of Silver Run II shareholders and government antitrust approvals. The transaction is expected to close in the fourth quarter of 2017.

Citigroup acted as capital markets adviser to Silver Run II. Tudor, Pickering, Holt & Co. was the company’s financial adviser and Latham & Watkins LLP as its legal counsel.

Citigroup was also sole financial adviser and lead capital markets adviser to Alta Mesa. Goldman Sachs and Morgan Stanley acted as additional capital markets advisers to Alta Mesa. Haynes & Boone LLP was the company’s legal adviser to Alta Mesa. JP Morgan was lead financial adviser and Barclays was co-financial adviser to Kingfisher.

Bracewell LLP acted as legal adviser to HPS Investment Partners and Kingfisher. Durham, Jones & Pinegar acted as legal adviser to ARM. Kirkland & Ellis LLP represented Bayou City Energy.

Darren Barbee can be reached at dbarbee@hartenergy.com.