Another E&P has turned an acquisition into an equity opportunity as RSP Permian Inc. (RSPP) said Oct. 7 it had a potential deal to acquire 4,100 net acres in the Midland Basin—and stock to sell.
The $137 million Midland deal, currently held together by a letter of intent, is a privately negotiated transaction between RSP and Wolfberry Partners Resources LLC, an entity owned in part by affiliates of the company.
Concurrent with the Oct. 7 announcement of the deal, RSP said it would make a public offering of 6 million shares of common stock. Within hours of the announcement, RSP upsized the offering to 7.6 million shares at $25.50. RSP opened trading at $26.45. The offering is expected to close Oct. 13.
“This is the most recent representation that the market remains amenable to equity use for certain transactions despite the implied ramifications for the oil macro,” said Brian Gamble, analyst with Simmons & Co. International.
The Midland acquisition includes 86 net horizontal drilling locations in the Middle Spraberry, Lower Spraberry, Wolfcamp A, Wolfcamp B and Wolfcamp D. The acquisition includes 25 wells with net production in August of 1.9 thousand barrels of oil equivalent per day (Mboe/d).
RSP said the acreage is largely contiguous acreage favorable for efficient infrastructure development. The land also would allow drilling longer lateral wells and would be 100% RSP operated on closing.
The potential acquisition would cap a 25% increase to RSP’s acreage footprint and horizontal development inventory in the core of the Midland Basin in the past few months, CEO Steve Gray said.
“These assets, which are in close proximity to our existing operations, are in the heart of the Midland Basin where we have drilled some of our best wells,” Gray said.
Based on analysis of the geological and technical data related to the properties, results of four horizontal wells and other information, Gray said he expects the assets to generate returns that rival any asset RSP owns.
“We intend to begin drilling on these properties soon after we close on them," Gray said.
If a purchase and sale agreement (PSA) can be reached, the transaction is expected to close in the fourth quarter of 2015, Gamble said.
A deal would be contingent on due diligence, negotiation of a definitive PSA, board approval, a fairness opinion from an investment banking advisory firm, closing conditions and purchase price adjustments.
RSP would have the option to pay $60 million at closing and the remainder within nine months with interest.
Offerings
RSP said its public stock offering could generate proceeds of about $193.8 million to the company, before underwriter's discounts, commissions and estimated offering expenses.
The company said proceeds would be used to fund the acquisition and for general corporate purposes. At $193.8 million, the company will exceed the potential Midland deal’s purchase price by more than 40%.
Even before RSP upsized its offer, Tudor, Pickering, Holt & Co. (TPH) analysts noted that RSP could generate up to $175 million.
“This over-equitizes the $137 million acquisition [if closed] and leaves excess proceeds to repay the revolver,” the firm said. Excess capital could also mitigate TPH’s 2016 cash flow outspend of about $100 million at strip pricing.
Other companies have recently piggybacked on acquisitions to make strategic runs at the public markets. Results have been uneven.
On Sept. 30, Concho Resources Inc. (CXO) offered 7.7 million shares to repay borrowings used to finance acquisitions and other purposes. Raymond James Investment Banking said the October offering raised $819 million.
Other companies, such as Weatherford International Plc (WFT), have backed out of equity and debt offerings. Weatherford saw its stock fall 17% after saying it planned to issue $1 billion worth of equity and debt for acquisitions. Weatherford withdrew the offer.
RSP said it intends to use the net proceeds from its offering to fund a portion of the purchase price, if consummated, with the balance for general corporate purposes, which may include funding RSP’s drilling and development program.
RSP has granted underwriter Goldman, Sachs & Co. a 30-day option to purchase up to 1.14 million additional shares of the company's common stock.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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