Orr Energy acquisition gives Synergy Resources bolt-on production in DJ Basin

CO-based Synergy Resources Corp. (NYSE Mkt: SYRG), a US oil and gas exploration and production company, has agreed to purchase from Orr Energy 36 producing oil and gas wells in the Wattenberg Field of the Denver-Julesburg Basin (DJ Basin). 

Synergy will pay a total consideration of $42 million, comprised of $30 million in cash and $12 million in shares of Synergy's common stock. 

The combined 36 oil and gas wells are currently producing at an average rate of 360 boe/d, with the oldest well in the field producing since 2006. All of the wells have been drilled vertically to the Codell, Niobrara and/or J-Sand formations. Synergy will be the operator on 35 of the 36 wells.

The acquisition includes leases covering a total of approximately 3,933 gross (3,196 net) acres. 2,191 of these net acres are in the core of the Wattenberg field, adjoining or near existing Synergy leased or producing acreage. Given the 20 acre spacing for vertical wells on this acreage, there is the potential to drill approximately 75 new vertical wells, and based on 80 acre spacing for horizontal wells, there is the potential to drill 55 Codell / Niobrara horizontal wells. 

In a note to investors following the announcement, Global Hunter Securities (GHS) analysts put out a rough estimate on pricing. A $75,000/flowing boe value gives a per acre value of $4,693, the analysts said, noting that Synergy did not provide a gas vs. oil production breakdown, which would influence the flowing boe assumption.

The other 1,005 net acres are northeast of the Wattenberg field in Grover, Colorado. Management plans to use existing seismic data acquired in the transaction to establish a drilling program for new vertical and horizontal wells on the acreage. 

Synergy will have a 100% working interest (77% net revenue interest) in 29 of the producing wells to be acquired, with a smaller working /net revenue interest in the remaining seven wells. Synergy will have a 100% working interest (80% net revenue interest) in the majority of future wells drilled on the leased acreage. 

Synergy Resources operational map

"The Orr assets were a prime target for us due to the strategic blocking nature to our acreage, and it allows us access to strategic pad sites in order to expand our vertical and horizontal drilling potential in this field," said William E. Scaff, Synergy vice president.

Future activity
Coinciding with the acquisition agreement, Synergy has amended the terms of its revolving line of credit and continues its long-term, expanding relationship with Community Banks of Colorado. The amended terms increase the maximum amount of borrowings available from $20 million to $30 million. The maximum interest rate on the line of credit is LIBOR plus 3.0%.

The move comes as no surprise as the company has been forthcoming about its desire to increase its assets in the area, said GHS analysts.

"SYRG management has been clear that should productive assets come on the block at a reasonable price it would jump, hence the increase in the company’s credit line from $20MM to $30MM. Adding inventory for horizontal drilling looks like a good move as SYRG plans to start its operated horizontal program mid-2013, and adding NE Colorado acreage is attractive given how well the play is working for NBL. Our preliminary per acre value is in line with recent CRZO Niobrara deals, although we caution that our per acre price estimate could go up if the assets prove to be disproportionately gassy. In the meantime, we should see SYRG guide up capex in 2013 from the current $55MM forecast, as the company opportunistically bolts on producing assets in its core area,” the analysts concluded.

The transaction is expected to close at the end of November.

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