Building upon its strategic position in the Bakken Shale, Continental Resources Inc. (NYSE: CLR) is buying Bakken producing and undeveloped properties and selling certain eastern region assets to help fund the purchase.
The Oklahoma City, OK-based company has agreed to acquire leasehold of approximately 120,000 net acres, primarily in Divide and Williams counties, North Dakota, and production of approximately 6,500 barrels of oil equivalent per day (boepd) for $650 million.
The transaction price is attractive, but the quality of the assets is questionable, said Jefferies & Co. Inc. analysts after the deal was announced.
“If we assume a valuation of $100k per flowing boe, the acreage basically comes for free. We do note, however, that these properties are likely not "premium" Bakken assets. Water cuts in these northern counties tend to be higher, resulting in lower well production and higher operating costs, although some operators have mitigated this issue by optimizing the completion technique, namely by using shallower fracs,” the analysts noted.
“A comparatively robust valuation of $114k per flowing boe suggests that these are oily, low decline assets, but we await more details from the company,” they continued, referencing Bakken players Magnum Hunter Resources and SM Energy projects.
“Magnum Hunter sees 43% IRRs for its Divide County wells at $85 oil. MHR is targeting EURs of 400 mbo with well costs of $7mm. SM Energy has guided to somewhat lower EURs of 365 mboe for its Divide County wells but with similar well costs of $6.8mm. Overall, our quick take is that this acquisition is an addition of second-tier inventory at an attractive price. The properties would add 375 net locations on 320-acre spacing, not including any potential for the lower benches,” the analysts said.
With an implied transaction value of $5,400/acre, noted Stifel Nicolaus analysts, the deal is in-line with recent acquisitions including Exxon’s purchase of Denbury Resources’ Bakken assets.
Continental is currently the largest leaseholder in the Bakken, with 984,040 net acres as of September 30, 2012. If completed, the proposed acquisition will increase this total to 1.1 million net acres.
East Region sale
"We are divesting non-core, conventional assets and re-investing the proceeds in an attractive acquisition that further builds our strategic, core position in the Bakken," said Harold Hamm, chairman and CEO.
As Hamm noted, part of the company’s funding strategy is to sell its producing crude oil and natural gas p roperties and supporting assets in its East Region for $125 million. The East Region primarily includes properties east of the Mississippi River, including the Illinois Basin and the state of Michigan, among other areas. Production from the properties included in the sale agreement averaged approximately 1,100 boepd for the three month period ended September 30, 2012.
The remaining $525mm of the Williston acquisition price tag should be easily handled by the undrawn $1.5 bil revolver, which could be expanded to the $2.75 bil borrowing base,” noted Jefferies.
If the Bakken acreage acquisition is completed as planned, the company expects additional 2013 drilling capital expenditures ($3.4 billion capex budget compared to $3.0 billion in 2012) will be largely offset by incremental cash flow from the properties.
Both transactions are expected to close prior to December 31, 2012 and remain subject to customary closing conditions and adjustments.