Hilcorp exits GOM shelf with $550M asset sale to EPL

EPL Oil & Gas Inc. (formerly Energy Partners Ltd.) has executed a purchase and sale agreement to acquire certain shallow water Gulf of Mexico (GOM) shelf oil and natural gas interests from Hilcorp Energy GOM Holdings LLC (Hilcorp) for $550 million.

EPL has submitted a 10% cash deposit to Hilcorp, who exits the GOM shelf with this sale.

The assets are currently producing approximately 10,000 barrels of oil equivalent (boe) per day, about 50% of which are oil. Estimated proved reserves as of the July 1, 2012 economic effective date totaled approximately 36.3 million boe, 54% of which are oil. The central GOM shelf properties include three fields that Hilcorp had acquired from Chevron Corp. in Ship Shoal Block 208, South Pass 78, and South Marsh Island 239. The three fields account for 64% of the current proved reserves, and approximately 82% of the total proved acquisition PV10 value estimated at $626 million using strip prices as of August 31, 2012. The currently estimated asset retirement obligation to be assumed by EPL in the acquisition is expected to total approximately $120 million.

“The transaction price of $550 million for nearly 10,000 boe/d of production implies an EV/boe/d of $55,000 compared to EPL trading at $82,000, with the discount coming from the higher gas cut (46% vs 22%),” said Stifel Nicolaus analysts in a note to investors Monday.

“We believe that this will be neutral to slightly negative to the stock today, but adds $3-5/sh additional upside over the coming 12 months. Near-term negative concerns is based on the fact that it increases the gas weighting, increases the leverage, and is not accretive on an EV/EBITDA basis based on our preliminary analysis,” the analysts said.

“The 12-month upside comes from the fact that this is not very dilutive either on an EBITDA basis (but this will depend on how much capex is needed to keep acquired production flat), it increases the critical mass of the company which should lower fixed field opex and allow the company to increase some of its exploration weighting, and should allow for a greater exploitation opportunity set on a go forward basis.,” the analysts continued.

The transaction will be financed by cash on hand ($60.8 million, as estimated by Stifel Nicolaus), an expansion of its Bank of Montreal borrowing base from $200 million to $450 million, and a $200 million unsecured bridge loan from Bank of Montreal and BMO Capital Markets (which is expected to remain unutilized). In conjunction with the acquisition, EPL plans to hedge 80% of its natural gas and oil production through 2015 and could secure a portion of its hedges as early as this week.

This, the company’s fourth acquisition since 2011, is characterized as “the most transformational,” said Gary Hanna, EPL’s president and CEO.

“The high operating control of 95% will permit us timely access to the development opportunities that exist on these properties. There are already over 90 low-risk, oil-rich shallow behind pipe and drilling opportunities, as well as numerous optimization projects that our operational teams will vigorously pursue,” he said.

Hanna said the transaction nearly doubles the company’s proved reserves to approximately 74 million boe and drives production above 20,000 boe per day, supports EBITDAX generation in 2013 in the range of $450 million to $500 and is accretive to the company’s key operational and valuation metrics.

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