In the latest in a series of Permian A&D deals, EOG Resources Inc. agreed to acquire the privately held operator Yates Petroleum Corp. The purchase will sig¬nificantly enhance EOG’s footprint in this hugely popular basin by more than 200,000 acres with the majority in Lea and Eddy counties, New Mexico.

In addition to absorbing about $245 million in debt, EOG will issue 26 million new shares, valuing the Yates assets at around $2.5 billion. If the entire purchase price were allocated just to the acreage, the implied multiple would be around $12,500 per acre, which is materially less than other recently announced land deals. However, there are other assets and associated production, so the amount allo¬cated to acreage underscores the relatively low price paid by EOG for some prime real estate.

According to EOG, the deal will con¬tribute roughly 1,740 prime drilling loca¬tions within the Delaware and Powder River basins, a 40% increase over its exist¬ing inventory.

Of particular interest is what EOG stands to gain by expanding its footprint in the Delaware. The Permian in general offers some of the most cost-efficient acreage available; with well costs averaging approx¬imately $6 million, the bolt-on acreage EOG acquired from Yates in Eddy and Lea counties will certainly bolster its Permian position and allow the company to shift its focus away from its less attractive Eagle Ford assets.

The median breakeven for EOG in Eddy County is $70.78/bbl and for Lea County, $36.26/bbl, while Yates shows a median breakeven of $106.80/bbl in Eddy and $78.87/bbl in Lea. In the current pricing environment, it’s evident that EOG shows lower breakevens when compared to Yates and is in a much better position to allocate capital to the newly acquired acreage in these respective counties where well eco¬nomics allow, specifically in Lea County.

When comparing both EOG’s breakevens within Lea and Eddy counties to the sub- basin averages in the Permian, EOG’s are slightly higher than the average in Eddy, but they outperform the Delaware Basin aver¬age by close to 100% in Lea. Thus, EOG has the potential to develop very productive wells in the newly acquired acreage within the Delaware.

According to EOG’s most recent reports on the transaction, the plan is to utilize current infrastructure in tandem with the bolt-on acreage acquired to enable longer laterals and benefit from the relatively low D&C costs associated with the Delaware Basin.

In terms of median normalized reserves per 1,000 feet of lateral for the two companies, EOG wells show con-siderably more promise with much higher esti¬mated recoveries in both counties (from 2x to 3x). With the ability to extend its laterals into the newly acquired Yates acreage, the operator will be able to access a greater portion of the stacked pay potential associated with the Wolfcamp and Bone Spring formations and ultimately increase reserve potential in an already lucrative region of the Delaware.

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