As confidence in the Permian's Delaware Basin grows, PDC Energy Inc. (Nasdaq:PDCE) has agreed to acquire two privately held companies, giving PDC access to approximately 57,000 net acres in Reeves and Culberson Counties, Texas with an average working interest of 93%.
PDC Energy will pay approximately $1.5 billion for the two companies, both backed by private equity firm Kimmeridge Energy Management Company, subject to due diligence and certain customary closing conditions.
Approximately 41,000 net acres are set in Reeves County and another 16,000 net acres are located in Culberson County. Current net production is approximately 7,000 boe/d (42% oil and 65% liquids) from 21 horizontal wells, with two additional wells in the completion and flowback phase.
PDC sees more than 700 gross estimated horizontal drilling locations targeting the Wolfcamp A, B and C zones with significant upside potential through downspacing and additional intervals, noting approximately 530 million barrels of oil equivalent (MMboe) of preliminary estimated net reserve potential based on combined total of only 4 to 12 wells per section.
President and CEO, Bart Brookman commented, "Through a methodical approach, we were able to execute our stated acquisition strategy and add an extensive inventory of highly-economic drilling locations that complement our already strong portfolio."
Even with a deal price close to $30K per acre for the Reeves position, the deal is "a wise strategic direction for PDCE, whose stock has been in limbo due to limited "core" running room in the Wattenberg," noted Seaport Global Securities (SGS) analysts Wednesday. OGFJ spoke to PDC Energy in 2010 and again in 2015. During that time, the company had narrowed its focus to include the core Wattenberg.
In a statement Lance Lauck, executive vice president corporate development and strategy for PDC Energy said this recent addition "is a significant step towards executing our vision of becoming a premier mid-cap E&P company. Adding this Delaware position to our Core Wattenberg acreage gives us more than one billion net boe of liquid-rich reserve potential in two of the top-tier US onshore basins."
"We view the acreage as highly coveted," SGS analysts concured, adding that the deal "stacks up in line with recent M&A deals from the likes of FANG ($26.5K/acre) and Silver Run/Centennial ($34K/acre). Furthermore, given PDCE's demonstrated operational acumen, and with high-quality new Delaware neighbors touting impressive returns (46%-67% at $55 oil in the Wolfcamp A, topping PDCE’s current Nio economics), we think this move should benefit capital efficiency metrics going forward.”
Consideration in the transaction includes approximately $915 million of cash and approximately 9.4 million shares of PDC Energy common stock (valued at approximately $590 million) privately placed to the sellers, thought by Seaport Global Securities analysts to be Arris Petroleum and 299 Resources. PDCE intends to fund the cash portion of the acquisition through potential equity and debt financings prior to closing.
Through committed financing from JP Morgan, PDCE has secured incremental liquidity, bringing its current liquidity to approximately $1.4 billion.
2016 Delaware Basin operating plan
In the remainder of the year, PDCE plans to spud approximately nine horizontal wells - seven of which have 1.5 or 2 mile laterals - and expand certain midstream infrastructure for an expected total capital outlay of approximately $55 to $65 million. Additionally, the company is finishing completion operations on two horizontal wells and plans to operate two drilling rigs by year-end 2016.
JP Morgan served as the exclusive financial advisor to PDC on the acquisition and sole provider of committed financing. Davis Graham & Stubbs LLP served as legal counsel to PDC. Evercore served as financial advisor and Sidley Austin LLP served as legal counsel to each of the sellers on the acquisition. The transaction is expected to close in the fourth quarter of 2016.