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LRR Acquiring Legacy Oklahoma Oil, Gas Properties

LRR Energy LP will acquire producing oil and natural gas assets in Central Oklahoma, in a legacy field in the Permian Basin, from an undisclosed seller for $38 million, the company said Tuesday.

Houston-based LRR said the primary asset being acquired is the Stroud Prue Sand Unit (SPSU), a waterflood area in Creek and Lincoln counties that lies in an oilfield discovered in 1943. The company said water injection activities began at SPSU, one of the largest waterfloods in the oilfield, in 1960.

According to LRR, the acquired acreage holds estimated proved reserves of about 2.5 million boe, of which 83% is classified as proved developed producing (PDP). The reserves are 89% oil, 6% natural gas liquids (NGL) and 5% natural gas.

Average net production on the acquired acreage was approximately 275 boe/d during the first half of 2014, 95% weighted toward liquids. The acreage has 110 active producing wells and 57 active injection wells.

The acquired acres "have a long-lived production profile with a proved developed reserve to production ratio of 24 years," LRR said. The properties "have a shallow decline profile with a projected three-year average annual PDP decline rate of 4%."

The acquired acreage has a current estimated annualized monthly operating cash flow of $6 million, and are 100% operated with average working interests of 100% and average net revenue interest of 87%.

"We expect this acquisition to be immediately accretive to distributable cash flow per unit and create long-term value for our unitholders," said Co-CEO Eric Mullins. Co-CEO Charlie Adcock added that the assets were a “great fit” for the company’s master limited partnership structure “and a strong complement to our existing Oklahoma operations."

According to a presentation by LRR in August, the company owns 148,000 gross (80,000 net) acres in the Midcontinent region of Oklahoma and Texas, including 10.6 million boe of proved reserves. In the Gulf Coast region of Texas, the company holds 15,500 gross (12,000 net) acres, with 3 million boe of proved reserves. Production in 2Q2014 in the two regions was 2,145 boe/d and 711 boe/d, respectively.

In the Permian, LRR holds 152,000 gross (124,000 net) acres in New Mexico's Chaves, Eddy and Lea counties, and in the Texas counties of Martin, Reagan and Ward, with 662 gross (533 net) producing wells and proved reserves of 16.5 million boe. LRR's 2Q2014 production in the Permian was 3,562 boe/d.

LRR said additional reserve potential from the acquired acreage is to be evaluated at the end of the year, and may include 10-acre infill development and replacing inactive wells.

The new transaction, LRR's first third-party acquisition, is subject to customary purchase price adjustments and closing conditions. It should close by Oct. 1, with an effective date of Sept. 1. The company said it expects to fund the acquisition through borrowings under its $500 million revolving credit facility, which currently has a borrowing base of $235 million.

"LRR Energy is working with its lending group to complete a redetermination of its borrowing base," the company said. "Management believes cash flow from operations, the capacity under the revolving credit facility and the proceeds from its at-the-market offering program will provide ample financial flexibility to execute its 2014 capital program and distribution strategy.

"LRR Energy expects to hedge 85% of estimated total PDP oil production associated with this acquisition through 2018. The acquisition is expected to be immediately accretive to distributable cash flow per unit."

During the second quarter, ExxonMobil Corp. added 26,000 net acres to its Permian portfolio, and said it planned to test waterfloods in the play using enhanced oil recovery (see Shale Daily,Aug. 1). Energen Resources Corp., the exploration and production (E&P) unit of Energen Corp., and other E&Ps are increasingly interested in legacy fields in the Permian, which had peak production in the 1970s (see Shale Daily, Nov. 22, 2013).

In related news, earlier this year the Oklahoma Geological Survey said it recorded 1,458 earthquakes in Lincoln County between January 2011 and February 2014. Researchers believe at least some of the seismic activity was triggered by activity at wastewater injection wells (see Shale Daily, July 15; March 10).

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