Carrizo To Unload 12,000-Acre Barnett Gas Position To Atlas

To purchase N TX Barnett shale dry-gas position which include 221 gross wells on more than 12,000 net acres in Tarrant & Denton cos., gaining 36 MMcfe/d, 277 Bcfe proved.

The newly formed E&P MLP Atlas Resource Partners LP, Moon Township, Pa., (NYSE: ARP) plans to purchase a portion of the North Texas Barnett shale dry-gas position held by Carrizo Oil & Gas Inc., Houston, (Nasdaq: CRZO) for $190 million in cash, marking the MLP's first acquisition following formation and establishing a base of long-lived dry-gas assets with upside.

The deal notches another sale in the economically constrained Barnett shale, where MLPs and private-equity buyers are snatching up long-term dry-gas production with future drilling opportunities once natural gas prices turn around. Atlas values the deal at $0.69 per Mcfe proved and $4,219 per flowing Mcfe.

The properties include 221 gross (approximately 110 net) wells on more than 12,000 net acres in southeastern Tarrant County and southern Denton County in the core of the Barnett shale. Net production is 36 million cubic feet of gas equivalent per day. Proved reserves according to Atlas are 277 billion cubic feet equivalent (99% gas, 52% proved developed). Carrizo places proved reserves at 312 billion cubic feet equivalent.

The properties feature 100 gross proved undeveloped and proved developed nonproducing locations. Atlas estimates a reserves-to-production ratio of more than 20 years. All acreage is held by production.

Atlas Resource Partners was formed two days prior to the Carrizo acquisition as an E&P MLP subsidiary to Atlas Energy LP (NYSE: ATLS), the parent of midstream MLP Atlas Pipeline Partners LP (NYSE: APL). Atlas Resource Partners via dropdown from Atlas Energy owns an interest in 8,500 producing natural gas and oil wells, with 167 Bcfe of net proved reserves, primarily in Appalachia and the Niobrara region in Colorado.

Atlas chief executive Edward E. Cohen says, "This transaction is the first step in the execution of our growth strategy for ARP. These Barnett shale assets are ideal: long-lived, producing assets which generate increased cash flow and distributions per unit.”

Atlas will fund the deal with $120 million in equity representing 6 million ARP common units at $20 per unit; and with approximately $70 million of debt. Atlas intends to hedge 100% of the acquired production for 12 months using swaps and puts, and 80% to 100% of production for an additional four years.

Carrizo intends to use the net proceeds from this sale to pay borrowings under its revolving credit facility and use the excess proceeds to partially fund its 2012 capex plan, largely in its liquids-focused Eagle Ford shale play.

Carrizo president and CEO S. P. "Chip" Johnson IV says, "Our corporate strategy has been to focus our capital expenditures on the highest return plays such as our liquids-rich Eagle Ford and Niobrara properties. We have significantly slowed the pace of development of our dry gas properties in the Barnett shale due to low natural gas prices. However, we had several strong indications of interest in this quality gas asset and are pleased to be able to announce this sale to Atlas."

Credit Suisse is financial advisor to Carrizo and Baker Botts LLP is legal adviser. Citigroup is financial advisor to Atlas and Jones Day and Ledgewood are legal advisors.

The deal is expected to close in late April. The effective date is Jan. 1, 2012.

Wells Fargo senior analyst David Tameron calculates metrics at approximately $5,300 per Mcfe per day and $0.61 per Mcfe of proved reserves. He says the deal value marks a low point for Barnett gas for public companies.

"For comparison purposes, last April Carrizo sold 8 million cubic feet of gas equivalent per day of nonop production and 122 billion cubic feet equivalent of reserves to KKR for $104 million, which equated to $12,530 per thousand cubic feet equivalent per day, and $0.85 per thousand cubic feet equivalent proved. Natural gas prices averaged $4.15 per thousand cubic feet equivalent for the 30 days prior to that transaction compared to $2.29 per thousand cubic feet equivalent for the 30 days prior to this transaction. Doesn't bode well for natural gas names."

Carrizo continues to market assets in the Gulf Coast and North Sea, and possibly a joint venture in the Niobrara.

In March 2011, privately held Legend Natural Gas IV LP acquired Barnett gas assets from Range Resources Corp., Fort Worth, Texas, (NYSE: RRC) for approximately $7,800 per Mcfe per day. EnerVest Ltd. along with MLP subsidiary EV Energy Partners LP acquired Barnett assets from EnCana Corp. in November for an implied value of $8,700 per flowing Mcfe.