QEP Resources Inc. (NYSE:QEP) has reported that its wholly owned subsidiary, QEP Energy Co., has entered into a definitive agreement to acquire oil and gas properties in the Permian Basin for an aggregate purchase price of approximately $950 million. The properties, which are located in the Midland sub-basin, primarily in Martin and Andrews counties in west Texas, will diversify the company’s exploration and production footprint.
Stern Agee analyst Tim Rezvan noted the $950 million Permian acquisition “put to rest persistent concerns on oil inventory that have overshadowed QEP's clear signals that it will fully separate its midstream business. Pricing seems fair, and the properties are in the right ZIP codes, between well-known operators who have led the delineation charge in the northwest portion of the Midland Basin. Multiple expansions from the current punitively low level appear inevitable as the bear case on QEP's oil inventory crumbles.
“The acquisition includes 6.7 mboe/d of existing production (68% oil) and 47 mmboe of estimated net proved reserves across 26.5K net acres,” he added. “The acreage is mostly on the border area between these two counties, where Diamondback Energy (FANG, $46.18, Buy) and Pioneer Natural Resources (PXD, $177.21, Neutral) have announced promising exploratory well results in multiple oil horizons.
“Valuing production at $75,000 per flowing boe, we derive a residual acreage value of $16.9K/acre,” Rezvan said. “On a pure reserves basis, the acquisition translates to a price of $20.21/boe of estimated net reserves … This deal provides a second repeatable, well-understood, stacked pay resource play to QEP's inventory. Results from successful offset operators show strong oil potential exists in 3-4 zones within the Wolfcamp formation, as well as shallower and deeper formations. The 26.5K net acre position in west Texas should provide oil diversification and ample running room for the company in two prolific basins into next decade.”
The analyst noted that, on a pro forma basis, the acquisition increases the company’s net debt to $3.7 billion. “Net debt/TTM EBITDA increases to 2.4x from 1.8x,” Rezvan commented. “While the acquisition can be funded from the company's existing credit facility, the company has signaled again it will look to sell non-core Mid-Continent assets. These assets include its Cana Woodford (337 Bcfe reserves as of y/e 2012) and Granite Wash (21K net acres) positions.”