Production

$47,000 Per Acre – Is This Deal a Steal?

The sale of Delaware Basin’s Silver Hill Energy Partners LLC which was being handled by Jefferies LLC got a little rich for Diamondback Energy Inc., (NASDAQ: FANG) which was rumored to be in discussions to buy Silver Hill for $2.5 billion, but said Oct. 10 that they were no longer actively pursuing the acquisition. Silver Hill is comprised of two privately held entities controlled by affiliates of Kayne Anderson Capital Advisors and Ridgemont Equity Partners.

RSP Creates Premier Permian Pure Play in the Core of Both Basins

RSP Permian Inc. (NYSE:RSPP) stepped up and said Oct. 13 it will acquire Delaware Basin’s Silver Hill Energy Partners LLC in a deal valued at about $2.4 billion. The Dallas-based company said it entered definitive agreements to acquire Silver Hill for $1.25 billion in cash and 30 million shares. Silver Hill controls about 68,000 gross (41,000 net) acres within the Delaware. To minimize the impact on the firm’s balance sheet, RSP plans an equity offering that is expected to raise $950 million in proceeds.

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Excluding adjustments, RSP will pay roughly $47,000 per acre for Silver Hill, according to analysts at investment bank Tudor, Pickering, Holt & Co., which is a huge price compared with the $40,000 per acre some analysts had expected and the $26,000 that Diamondback paid for Delaware properties from Natural Gas Partners-backed Luxe Energy in July, which set a new high at the time.

Silver Hill’s acreage is located in Loving and Winkler counties in West Texas and includes 58 producing wells, 49 of which are horizontal. The deal also gives RSP Permian about 3,200 gross (1,950 net) total undeveloped locations in the Delaware.

RSP’s acquisition of both Silver Hill entities will have an effective date of Nov. 1. However, the two transactions will close in stages between the fourth quarter this year and the first quarter in 2017. When complete, the acquisition will increase RSP’s total Permian holdings to over 100,000 net acres. It will also provide roughly 15,000 barrels of oil equivalent per day of oil-weighted production. The transaction adds 50% more production to RSPP, which averaged 29,761 Mboe/d in the third quarter, Securities and Exchange Commission filings show.

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Upon closing, Kayne Anderson, Ridgemont, and other Silver Hill shareholders are expected to collectively own about 20% of RSP’s outstanding shares. In addition, RSP expects to add Kyle D. Miller, CEO of Silver Hill, to its board of directors.

Much of RSP’s core acreage is situated on the Midland side and is ideally located in the core of the play. The company’s “focus area” extends across Martin, Midland, and Glasscock counties where they have concentrated on the most productive Wolfcamp and Lower Spraberry reservoir intervals in the Midland Basin. The firm’s track record in the Midland Basin has been impressive. Its production has a high oil content and they have reduced drilling costs 40% since the 2014 peak. RSP expects to complete 54-58 horizontal wells in 2016.

Steve Gray, CEO of RSP, said the returns of Silver Hill’s horizontal wells compare favorably with the company’s Midland Basin assets.

“We have been patient in our M&A efforts to ensure that we pursue accretive opportunities for our shareholders that enhance our already deep inventory of high-return horizontal locations,” Gray said in a statement. “We believe the assets of Silver Hill are located in the best part of the Delaware Basin and will be a perfect complement to our existing asset base.”

RSP has significantly altered its outlook for 2017 and beyond with the acquisition of Silver Hill Energy Partners. The $2.4 billion price tag looks lofty but it well may be a steal. Analysts have increased stock projections to around $53 per share, significantly ahead of the current stock price, making RSP one of the most compelling upstream investment opportunities.

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