Prices for oil and gas properties in West Texas’ Permian Basin - particularly the Delaware and Midland Basin areas - are reaching nosebleed highs, as evidenced by the deal announced by RSP Permian Inc. (NYSE:RSPP) on Oct. 13.
The $2.4 billion purchase — of Kayne Anderson Capital Partners LLC-backed Silver Hill Energy Partners LLC and Silver Hill E&P II LLC - works out to around $47,000 per acre in the Delaware, according to analysts at energy-centric investment bank Tudor, Pickering, Holt & Co., or TPH. That’s a pretty sweet price compared with the $40,000 per acre some analysts had expected and the $26,000 to $27,000 that Diamondback Energy Inc. (NASDAQ:FANG) paid for Delaware properties from Natural Gas Partners-backed Luxe Energy in July, which set a new high at the time.
TPH thinks the deal is fairly valued, as RSP will also get additional properties that didn’t receive much value in the transaction but will provide a lot of upside with additional drilling. The analysts aren’t boosting their $58 per share valuation of the company based on the acquisition but are keeping their buy rating on the shares. “The number of prospective pay zones and pace of activity will be instrumental in bringing the necessary value forward to justify the cost of the acquisition,” they said.
The auction — being handled by Jefferies LLC - looks to have been a little rich for some companies, including Diamondback, which the Wall Street Journal reported last week was the likely bidder with an offer of $2.5 billion, citing sources. Earlier this week Diamondback CEO Travis Stice confirmed that the company had been engaged in discussions involving an acquisition but wasn’t “actively pursuing further negotiations at this time.”
The valuation, which is reflective of increasing oil prices as well as an area that is more economical to drill, is a positive read-through to other companies operating there, TPH said, including Anadarko Petroleum Corp. (NYSE: APC), EOG Resources Inc. (NYSE:EOG), Energen Corp. (NYSE:EGN) and Royal Dutch Shell plc (NYSE:RDS.A).
The deal also could lead to high prices being paid for other private equity-backed companies with properties in the area, including Quantum Energy Partners’ Jagged Peak Energy LLC and Pine Brook Partners LLC’s, Warburg Pincus' and Yorktown Partners LLC’s Brigham Resources LLC, which also have been said to be open to a sale or an initial public offering. It may be time to get out while the getting’s good.
