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Rosetta Resources Entering Permian With $768M Deal

Rosetta Resources Inc. has agreed to pay Comstock Resources Inc. $768 million for a package of Permian Basin oil and liquids-rich assets, giving it entry into the West Texas basin.

The acquisition covers 53,306 net acres (87,373 gross) in Reeves and Gaines counties and gives the company, which had been a one-trick pony in the Eagle Ford, additional oil and liquids-rich assets on which to focus. During a conference call to discuss the deal, CEO Jim Craddock said the Permian had been high on the company's mergers and acquisitions target list for some time.

Last summer, then-CEO Randy Limbacher said the company would spend some of its Eagle Ford profits on acquisitions in lower-risk plays (see Shale Daily, Aug. 9, 2012).

"This oil-targeted acquisition is an important next step in Rosetta's strategy to pursue new growth opportunities and build our inventory of long-lived, oil-rich resource projects," Craddock said Friday. "These assets complement our Eagle Ford properties and are a good fit with the experience and technical knowledge of our operations team.

"This transaction provides entry into the prolific Permian Basin with both existing production and strong growth potential in proven delineated areas as well as prospective exploration targets on undeveloped acreage. The addition of new capital project inventory provides competitive options as we prepare to deploy the free cash flow generated by our Eagle Ford assets."

Rosetta shares closed down 2 cents Friday at $49.98. Comstock shares closed up nearly 13% at $18.00.

The Reeves County assets located in the Delaware Basin include 40,182 net acres and 74 producing (52 operated) primarily Wolfbone wells. Total current net production is 3,300 boe/d, of which more than 73% is oil. Rosetta said it projects "significant growth potential" for the area based on an estimated 1,300 gross, or nearly 800 net well locations targeting the Wolfbone on 40-acre vertical well spacing.

Rosetta estimates total net risked resources potential of 145 million boe, of which 67% is oil and 82% liquids. Potential upside also exists from further vertical well downspacing and potential horizontal drilling, including the Wolfcamp formation, none of which is currently included in the resource estimate, the company said. Rosetta would be operator of the majority of the Reeves County assets.

Rosetta COO John Clayton said the additional core asset in the Permian complements activities in the Eagle Ford, giving it repeatable development opportunities in "two of the most prolific plays in the U.S. today." Well economics in the Delaware Basin are comparable to those in the Eagle Ford, and activities in both plays can withstand swings in commodity prices.

The Gaines County assets located in the Midland Basin cover 13,124 net acres and are currently not delineated. Potential exists for multiple exploratory opportunities in the area, Rosetta said, adding that its resource estimate for the Permian Basin acquisition excludes potential future resources from the Gaines County acreage.

Rosetta's technical staff is getting schooled on the Midland Basin and the company is optimistic for development opportunities, Clayton said during the conference call. "If it's there, they'll find it." Last November, Clayton hinted at new venture areas for the company but did not provide details (see Shale Daily, Nov. 12, 2012).

One analyst who follows the company was curious whether the Permian acquisition means a step away from the Eagle Ford. Craddock said it doesn't and that Rosetta is "always interested in expanding our footprint in the Eagle Ford."

In a note Friday, Wells Fargo Securities analyst Gordon Douthat gave a nod to the recent changing of the guard at Rosetta and wrote that the Permian deal is a positive for the company "...as the new management team makes its mark with [a] long-awaited transaction to acquire its next growth driver." He also said industry activity has been picking up in the Delaware Basin as evidenced by names such as Clayton Williams Energy Inc., Concho Resources Inc., Energen Corp., Cimarex Energy Co. and Whiting Petroleum Corp.

The transaction is to be effective as of Jan. 1, 2013 and is expected to close on or about May 15, subject to due diligence and conditions. Rosetta said it has secured an additional $700 million of committed financing for the transaction with the potential of accessing the capital markets before closing.

While Rosetta has been blowing up production records in the Eagle Ford (see Shale Daily, Feb. 28), Comstock has had a rough time of late as it transitions to an oilier company. For the fourth quarter Comstock reported a net loss of $78.2 million due to impairments of gas producing properties and exploratory acreage (see Shale Daily, Feb. 14).

Comstock said it would use sale proceeds to cut debt and fund an increase in its Eagle Ford drilling program this year.

"This transaction substantially enhances our balance sheet by providing us with an opportunity to improve our liquidity and leverage position. The sale will also yield a strong return for our stockholders on our investment in this region," said CEO Jay Allison. "We will now direct our resources to accelerate the development of our oil properties in the Eagle Ford Shale in South Texas."

The company also revised its capital budget for 2013 to reflect the divestiture of the West Texas properties and an increase in drilling activity in its Eagle Ford. Comstock is now projecting to spend $410 million in 2013 on drilling activities and $12 million on exploratory leasehold for total capital expenditures of $422 million.

Comstock said it plans to spend $347 million to drill 82 wells (50.5 net) in South Texas and East Texas/North Louisiana. The Eagle Ford will account for $312 million of the budget where Comstock plans to drill 72 wells (46.9 net) with the remainder related to the company's natural gas properties primarily in East Texas and North Louisiana.

Comstock said it plans to increase the number of operated rigs in South Texas from three to six during the second half of 2013.

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