SM Energy adds Permian acreage through $980M acquisition of Rock Oil Holdings

Denver, CO-based SM Energy Company (NYSE: SM) signed a deal that stands to more than double its total acreage position in the Midland Basin area of the Permian Basin, at the same time adding 80% to production volumes in the basin.

Riverstone Holdings LLC has signed a definitive agreement pursuant to which Riverstone Global Energy and Power Fund V LP (Fund V) and minority partners have agreed to sell Rock Oil Holdings LLC, a Houston- and Denver-based oil and gas company, to SM Energy for $980 million in cash. Since its formation, Rock Oil has aquired its way to a position of approximately 24,783 net acres in the Midland Basin. Rock Oil, with its horizontal development program in Howard County, TX, currently produces approximately 4,900 boe/d.

In a note Monday morning, analysts with Seaport Global Securities (SGS) said the deal is positive and "borderline transformational," noting that with approximately 47,000 net acres in the Midland Basin, SM Energy "will now start to be comped vs. the Permian pure-play crowd. This positions SM to potentially be re-rated higher given the valuation gap (SM at 5.6x FY17 EV/EBITDA vs. Permian group at ~11x). On this deal specifically, we think ~$32K/acre is a fair price given recent wells trending above 1 MMboe EURs."

SM Energy will finance the deal by offering 15 million shares of common stock (+2.25 million shoe), "equating to approximately $505 million gross based on Friday’s close, along with $100 million of senior convertible notes due 2021," SGS analysts estimated.

The purchase price represents approximately 22% of SM Energy's current $4.5 billion enterprise value, noted Capital One Securities analysts, adding that, by its estimates, "the $28K - $30K per adjusted undeveloped acre for the properties (depending on value assigned for production)...is quite a bit above recent transaction comps in the Howard County area." 

While still "working through model updates," said Brian Velie of Capital One Securities, "at first blush, the dilution looks significant. However, SM's focus turned to the Midland Basin this year, and with just about 20K net acres before this deal, the company needed to scale up in order to make it a long-term piece of the portfolio."

In a statement, SM Energy president and CEO, Jay Ottoson, said the company plans to run one rig in the acquired acreage in the fourth quarter of 2016 and two rigs throughout 2017. The company has increased its estimate of total capital spend for 2016 by approximately $15 million to $20 million to a range somewhere between $685 million and $690 million.

Jefferies served as lead financial advisor to Rock Oil and Riverstone Holdings LLC on the transaction. Petrie Partners also acted as a financial advisor to Rock Oil.  Latham & Watkins LLP acted as legal counsel to Rock Oil and Riverstone.

The transaction is subject to customary closing conditions and is expected to close in early October.

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

Making DDoS Mitigation Part of Your Incident Response Plan: Critical Steps and Best Practices

Like a new virulent strain of flu, the impact of a distributed denial of service (DDoS) attack is...

The Multi-Tax Challenge of Managing Excise Tax and Sales Tax

To be able to accurately calculate multiple tax types, companies must be prepared to continually ...

Operational Analytics in the Power Industry

Cloud computing, smart grids, and other technologies are changing transmission and distribution. ...

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...