Midstates Buys Mississippi Lime Acreage

The purchase price includes $325 million in cash and 325,000 shares of Series A preferred stock in Houston-based Midstates with an initial value of $1,000 per share. The deal for the acreage in Oklahoma and Kansas is expected to close around Oct. 1, 2012.

Midstates Petroleum Co (NYSE: MPO) plans to buy 84,000 net acres in the Mississippi Lime from Eagle Energy Production LLC for $650 million in cash and shares.

The purchase price includes $325 million in cash and 325,000 shares of Series A preferred stock in Houston-based Midstates with an initial value of $1,000 per share. The deal for the acreage in Oklahoma and Kansas is expected to close around Oct. 1, 2012.

The deal would add 37 million barrels of oil equivalent (MMboe) in proved reserves that are 35% oil and 23% natural gas liquids, of which 35% are proved developed producing. The reserve to production ratio for the region is 14.7 years.
The acquisition includes includes 114 gross producing wells that are 85% operated with an average 67% working interest and 53% net revenue interest. Net current daily production from the properties is approximately 7,000 Boe per day.

The deal includes 103,000 net acres of which 84,000 are in the Mississippian Lime play with 78,000 in Oklahoma and 6,000 in Kansas; the remaining 19,000 are in the Hunton play in Oklahoma. Drilling and completion costs have averaged $3.7 million per horizontal well.

The purchase also expands Midstates drilling inventory by over 600 gross drilling locations, all of which are horizontal. Currently Midstates is utilizing three rigs in its drilling program and expects to increase to four by year-end 2012 and will assume Eagle’s hedges on its production.

John Crum, Midstates chief executive and president says, “The properties we are acquiring in the Mississippian Lime play are particularly appealing because they are in a market-recognized, emerging horizontal oil play with good predictability and solid economics. … This transaction will quickly increase our scale and critical mass.’’

Once the deal closes, Midstates will continue to have an oil-weighted proved reserve base of approximately 63.2 MMboe of which 45% will be oil, 20% NGLs and the remainder natural gas, and 41% of the total reserves will be proved developed. The average reserve life will increase to 11.3 years from 8.9 years. The Mississippian Lime properties, which are located in a conventional carbonate reservoir with wells drilled to approximately 6,000 foot vertical depths, are an excellent geological and operational fit.

None of the properties are subject to preferential rights, and the leases are held by production or have lease terms that will allow Midstates to protect the acreage position at a modest drilling pace. Midstates has entered into a transition services agreement with Eagle management and staff for a twelve-month period following transaction closing.

Steve Antry, chief executive of Eagle, says, "This transaction represents a significant milestone for both the employees of Eagle and our investors. We are delighted that Riverstone, our financial sponsor, will maintain a significant investment in Midstates and continue to support the growth of the combined portfolios."

Evercore Partners, SunTrust Robinson Humphrey, and BofA Merrill Lynch served as advisors to Midstates in connection with the acquisition.

Midstates has secured $500 million in committed financing from BofA Merrill Lynch, SunTrust Robinson Humphrey, Goldman, Sachs & Co., and Morgan Stanley. Midstates may use the proceeds from this financing or a debt offering to fund the cash portion of the transaction and to enhance the Company’s liquidity.

In addition, the Company has secured commitments from SunTrust Robinson Humphrey, BofA Merrill Lynch, Goldman, Sachs & Co. and Morgan Stanley to increase the borrowing base of its revolving credit facility to $235 million in advance of the transaction close, and pro forma for the transaction, to increase the borrowing base to $250 million. This capital structure is expected to give the Company liquidity to fund its development program through the end of 2013.

The preferred stock dividend is at a rate of 8.0% per annum, which will be payable, at the option of Midstates, in cash or additional amounts added to the liquidation preference value. The preferred stock is not convertible into Midstates’ common stock until the 21st day after the date on which Midstates mails to its shareholders an information statement regarding the issuance of the preferred stock (as required by SEC rules), and the holder of the Preferred Stock may not convert the Preferred Stock before the first anniversary of the date of issuance, at which time it is convertible at $13.50 per share.

The conversion of the preferred stock must be done in its entirety and not in part. The preferred stock’s mandatorily convertible on the third anniversary of the date of issuance at a price no greater than $13.50 per share and no less than $11.00 per share.

Until conversion, the holder of the preferred stock will have certain voting rights and the right to appoint one director to Midstates’ board of directors, who will be an employee of Riverstone or its affiliates. The issuance of the preferred stock to Eagle in the acquisition has been approved by stockholders holding a majority of Midstates’ outstanding shares of common stock.

Pro-forma post-acquisition ownership of Midstates at a $13.50 conversion price on the first available conversion date would be 30% public stockholders, 30% First Reserve, 27% Riverstone and Eagle management, and 13% Midstates management, founders and employees.