Deal metrics fall within the wide range set by previous deals, say analysts
Penn Virginia Corp. (NYSE: PVA) entered into a definitive agreement with Houston-based Magnum Hunter Resources Corp. (NYSE: MHR) to acquire producing properties and undeveloped leasehold interests in the Eagle Ford Shale play for approximately $400 million.
The acquisition, in areas adjacent to PVA’s current position in the area, includes 19,000 net Eagle Ford acres in Gonzales and Lavaca counties with 3,000 boe/d of production (March average), composed of roughly 90% crude, from 49 gross (roughly 24 net) producing wells.
Following the transaction’s close, expected to take place in mid-May, Penn Virginia will have approximately 83,000 gross (54,000 net) contiguous acres in the volatile oil window of the Eagle Ford Shale. The acquisition increases PVA's drilling inventory by 169 net locations.
“This acquisition will bring our total leasehold position to over 54,000 net acres with up to 640 drilling locations or, at a minimum, an eight-year inventory based on the expected drilling program across our expanded footprint. Increasing our rig count to six rigs should allow us to achieve significant growth in this high-margin play,” noted H. Baird Whitehead, president and CEO of Penn Virginia.
When the transaction closes, Magnum Hunter will continue to own approximately 7,000 net mineral acres located in Fayette, Lee, and Atascosa Counties in South Texas. Magnum Hunter is participating in a new horizontal Pearsall Shale well with Marathon Oil Corp. that is currently drilling in Atascosa County.
The announcement of the sale is bittersweet, said Gary C. Evans, chairman of the board and CEO of Magnum Hunter Resources, who talked to OGFJ in November about the possibility of selling what is the company's most mature asset.
"It's not something we have to sell. It's not something we're being forced to sell. It's just that we see our upside as being defined. We've done about as well as we can do in this play with some of the highest producing wells throughout the entire Eagle Ford Shale. We've made significant improvements in the well completions, it is a "well-oiled machine", and it might be better suited for someone with a lower cost of capital," he said at the time.
Since entering the play with the acquisition of Sharon Resources Inc. in September 2009, Magnum Hunter has generated approximately $80 million of net cash flow from the region as of the beginning of 2013, Evans noted in a prepared statement. Based on the PVA purchase price and the net investment to-date, the cash flow implies a greater than two times return on capital invested over the past 3 years and an IRR in excess of 80%, Evans continued.
"It has always been our belief that as the various shale plays mature, building scale is extremely important for achieving long term economic value and that is what is being accomplished today," Evans said.
PVA plans to fund the acquisition mostly with debt and has announced a senior notes offering. PVA may also opt to fund roughly $40 million through the issuance of 10 million shares to MHR. PVA has obtained a senior unsecured bridge facility from the Royal Bank of Canada and Wells Fargo to backstop any financing requirements.
The price looks decent based on pv10, noted Jefferies LLC analysts in a note to investors following the announcement. “PD locations have a pv10 of $156mm, while 51 gross PUD locations have a pv10 of $85mm. If we extrapolate the PUD pv10 to all undeveloped locations, we arrive at a total value of $700+mm. Note, however, that this estimate is not adjusted for the timing of unbooked locations, and pv10 of unbooked locations may be lower,” the analysts noted.
With three major deals in a month and a half, the Eagle Ford remains significant in the unconventional resources space. Aurora Oil & Gas Ltd. and Sanchez Energy Corp. both announced Eagle Ford deals in March.
According to Jefferies analysts, metrics of the PVA deal “fall within the (wide) range set by prior transactions.”
The production metrics value the deal close to $133,000 per flowing boe, higher than the recent Sanchez/Hess deal valued at roughly $60,000 per flowing boe, noted Jefferies analysts, continuing that the difference may be in the quality of the acreage. “MHR's wells with 20+ frac stages have ip'd at an average of 1,600 boe/d and recorded 30-day rates of 870 boe/d. MHR. On an acreage basis (not adjusted for existing production), the transaction implies $21,000 per acre. This looks cheaper than the Marathon (MRO, $33.57, NC) / Paloma deal from mid-2012, which transacted at $44,100 per acre for 17,000 Karnes / Live Oak acres,” they continued.
RBC Capital Markets is serving as exclusive financial advisor to Penn Virginia Corp. on the transaction.