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Midstates Making $620M Anadarko Basin Acquisition

Midstates Petroleum Co. Inc. is buying producing properties, as well as developed and undeveloped acreage, in the Anadarko Basin in Texas and Oklahoma for $620 million in cash from Panther Energy LLC and its partners Red Willow Mid-Continent LLC and Linn Energy Holdings LLC.

The deal adds about 36.4 million boe of proved reserves that are 45% oil and 21% natural gas liquids (NGL), of which 34% are proved developed producing, Midstates said. It increases the company's net daily production by 8,000 boe/d (67% liquids), enhances its drilling inventory with more than 700 "low-risk, repeatable horizontal drilling opportunities" and expands its acreage position with140,000 net acres with multiple objectives (102,000 in Texas and 38,000 in Oklahoma).

Midstates CEO John Crum said during a conference call that the acquisition "fits our model perfectly, providing proven production, proven reserves and proven drilling locations.

"This transaction quickly increases our scope and scale and provides a significant increase to our inventory of drilling locations. It offers excellent upside because of the number of prospective formations across this acreage base. We are able to quickly assume control of the properties and accelerate the drilling program because of the experienced technical team we've assembled in Tulsa [OK] and in Houston, many of whom have already worked this basin."

Crum said the Anadarko Basin acquisition is "an ideal complement" to the company's activities in the Mississippian Lime and the Wilcox interval of the Upper Gulf Coast Tertiary trend.

"On a variety of key metrics and in particular cash flow, the transaction is immediately accretive in 2013, and with a full year impact from the Panther assets is strongly accretive in 2014 and beyond," Crum said. "It increases our year-end 2012 proved reserves by almost 50%, grows our fourth quarter production by over 50%, and nearly doubles our active gross well count...This acquisition strengthens and diversifies Midstates' investment portfolio and lowers the overall risk profile of the company."

Primary horizontal drilling targets include the Cleveland, Marmaton, Cottage Grove and Tonkawa formations.

About 60% of the total acreage is held by production, Midstates said. There are about 280 gross producing wells, more than 80% of which are operated with an average 69% working interest and 55% net revenue interest, Midstates said. The acquisition gives the company more than 100 million boe of internally estimated resource potential, it said.

"Adding this new third focus area provides Midstates the opportunity to build upon our operational strengths and leverage our presence in the Midcontinent region that we established last year in Tulsa after completing our Mississippian Lime acquisition [see Shale Daily, Aug. 14, 2012]," Crum said. "The Anadarko Basin is well understood by our team and the industry and will enhance Midstates' overall investment profile. Returns on the wells in this region are very attractive and the operating costs are comparable to our existing cost structure."

Besides the Cleveland, Marmaton, Cottage Grove and Tonkawa formations, there is potential upside from drilling the deeper lower Pennsylvanian and Mississippian sections on the acquired acreage, Midstates said. Panther is running three rigs in its drilling program and Midstates said it plans to double that activity level by late summer and run a six-rig program with three to four rigs drilling for the Cleveland formation and two to three drilling for the Marmaton, Cottage Grove and Tonkawa formations.

"Similar to the Miss Lime deal, [Midstates] is buying de-risked producing assets with a lot of development runway," Wells Fargo Securities analysts said in a note Thursday. "Also similar to the Miss Lime, this play has low well costs, which in our view is an important advantage for a smaller operator in the unconventional game.

"While the addition of another Midcontinent play that has not garnered much attention from the Street is likely to be advantageous off the bat, if the company can begin to show organic growth and [internal rates of return] in the range they are touting, we believe it will be a valuable addition to the portfolio. Also worth noting [is] that [Midstates] believes the deal is accretive this year to cash flow and other metrics and highly accretive next year."

During 2013, Midstates expects to drill 40-45 wells on the newly acquired acreage, all of which will be horizontal wells. Drilling and completion costs have averaged $3 million per horizontal well, with wells drilled to an average vertical depth of 6,000-8,000 feet with 4,000-4,300 foot laterals and 15-17 stages of fracture stimulation.

Midstates pro forma reserves including the acquisition will continue to be oil and liquids-rich and total 111.8 million boe, consisting of 48% oil, 20% NGLs, and 32% natural gas. The reserve life of the assets being acquired is about 12.5 years.

In connection with the acquisition, Midstates has secured $620 million in bridge loan commitments from Morgan Stanley Senior Funding Inc. and SunTrust Robinson Humphrey Inc. The company said it intends to permanently finance the acquisition by raising $725-750 million, of which $100-125 million would be equity, pending market conditions, and the balance would be debt. Midstates has also received commitments from SunTrust and Morgan Stanley to increase the borrowing base under its credit facility to $425 million at closing of the transaction.

Panther Energy and Red Willow are subsidiaries of the Southern Ute Indian Tribe Growth Fund. The transaction is to be effective April 1, 2013, and closing is expected on or about May 31.

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