Surge Energy Agrees to $420 Million Midland Basin Acquisition

Surge Energy US Holdings Co. agreed on Jan. 31 to a “significant Midland Basin acquisition” for about $420 million.

Based in Houston, Surge Energy currently holds approximately 93,000 net acres in the Permian Basin. The acquisition on Jan. 31, from private equity-backed Grenadier Energy Partners II LLC, will add leasehold interest and producing wells in Howard County, Texas, where Surge Energy’s position in the northern Midland Basin is partly located.

“This acquisition is consistent with our strategy of building a long-term, sustainable oil and gas company,” Surge Energy CEO Linhua Guan said in a statement on Jan. 31. “The combination of both production and high-quality inventory support both near-term cash flow and strong economic returns for years to come.”

Grenadier Energy Partners is an upstream oil and gas company with headquarters in The Woodlands, Texas, and backing from EnCap Investments LP and Kayne Anderson Capital Advisors.

In late 2019, Grenadier had previously agreed to a three-way merger agreement with HighPeak Energy and blank-check company Pure Acquisition Corp. However, the combination, which was expected to create the largest pure-play northern Midland Basin E&P company, was ultimately terminated in April 2020 following the oil market crash.

Grenadier originally entered the Midland Basin in November 2016 through a joint venture development agreement with a large independent in Howard County.  As the result of an active drilling and leasing program and 15-plus acquisitions, the company has grown its original 7,000 net-acre position in Howard County to over 20,000 acres, according to its website.

In its Jan. 31 release, Surge Energy said it signed a purchase and sale agreement to acquire Grenadier II’s leasehold interest covering approximately 18,010 net acres in Howard County. The acquired assets also include an operated inventory of approximately 120 high-quality, economic future drilling locations and average production of about 9,000 boe/d, roughly 75% of which is oil.

Analysts with Enverus estimate Surge Energy is acquiring Grenadier’s largely undeveloped position, which offsets Surge to the southeast, for roughly $9,300 per undeveloped acre.

“The deal screens relatively cheap compared to recent transactions in Howard of similar scale,” the Enverus analysts wrote in a research note on Feb. 1.

“The acquisition provides additional runway in Howard, a region with superior reservoir quality to the company’s acreage to the north in Borden County,” the Enverus analysts added.

Grenadier II formed in July 2012 with funding in the amount of $340 million from  EnCap Investments and Kayne Anderson Capital. Additionally, Grenadier II has established a $300 million credit facility with J.P. Morgan Chase Bank, the company website said.

Surge Energy expects to close the Grenadier II transaction late in the first quarter. Citi was financial adviser to Surge Energy. Jefferies LLC was financial adviser to Grenadier II. Legal advisers included Thompson & Knight LLP for Surge Energy and Vinson & Elkins LLP for Grenadier II.