EOG Resources Inc. agreed Tuesday to pay an estimated $2.5 billion-plus in cash and stock for Yates Petroleum Corp. and affiliates, doubling the Houston-based independent's position in the Permian Basin’s Delaware play and Powder River Basin.
The deal with privately held Yates, based in Artesia, NM, would give EOG a combined 424,000 net acre position in the Delaware sub-basin and initiate a 150,000 net acre foothold in the emerging Northwest Shelf of the Permian.
EOG's position in West Texas and southern New Mexico would increase overall to 574,000 net acres, while its Powder River position would double to around 400,000 net acres.
The deal is "transformational," EOG CEO Bill Thomas said during a conference call Tuesday morning. "This transaction combines the companies' existing large, premier, stacked-pay acreage positions in the heart of the Delaware and Powder River basins, paving the way for years of high-return drilling and production growth.
“Additionally we are thrilled to welcome Yates' 300 employees to the EOG family and look forward to continuing the important presence Yates has established in the community of Artesia, NM."
Thomas called it “an honor” to combine with the 93-year-old U.S. oil legend.
"It clearly illustrates Yates' confidence in their acreage and EOG's technical and operational expertise to bring forth the most value from that acreage,” he said. “Yates demonstrated great foresight in establishing positions in stacked, multi-zone plays...The combined acreage, in concert with EOG's technical edge, will be transformational in the development of these plays."
The acquisition "is a bigger deal than we've done in the past. Most have been bolt-ons and smaller, but...it really boils down to this acreage quality is so high, it offered a unique responsibility."
For insights on the Permian Basin shared by the producers most active in the play, check out NGI’s latest special report, Permian Basin: ‘The Mother Lode.’
Exploration and production chief Billy Helms explained how the merger came about.
"Through the years we maintained a great relationship with Yates' employees," he told analysts. "We have long admired the company, the employees, the acreage positions they have been able to establish...Earlier this year, we initiated contact with Yates and were able to work through several issues and ultimately agree to this combination...It is truly a once in a lifetime opportunity for EOG to join forces with a company such as Yates..."
Every acquisition target for EOG "must meet strict standards," Thomas said. For one thing, the leasehold under consideration "has to be as good as or better" than any existing acreage in the portfolio. It also has to be "at a fair price and it must be funded in a prudent manner...Yates checks all of these boxes...It's not about getting bigger but about getting better."
The Yates portfolio should compete for capital almost as soon as the transaction is completed, as it is expected to "raise the quality of the portfolio," Thomas said. "We will be able to concentrate more capital in the most important parts of the resource plays...driving growth in the future."
Yates is "truly a rare gem that meets EOG's high rate of return hurdle...It's no secret the Delaware is one of the best resource plays in the country...where EOG has drilled some of the most prolific wells in the basin..."
EOG already is the largest oil producer in the Lower 48 states, with average output of 551,000 boe/d net.
Yates, which has been working since 1924 when it drilled its first oil well in New Mexico’s state trust lands, currently produces 29,600 boe/d. All together Yates holds 1.6 million net acres across the western United States, concentrated in the Permian and Wyoming’s Powder River.
"EOG is our partner of choice as we look to extend Yates' 93-year legacy," said Chairman Emeritus John A. Yates Sr., who is the son of founder Martin Yates Jr. "As we enter a new era of unconventional resource development, we are excited to join forces with another pioneering company like EOG."
Yates has 186,000 net acres of stacked pay in New Mexico's Delaware sub-basin, prospective for the Wolfcamp, Bone Spring and Leonard Shale formations. Combined, EOG's total Delaware acreage position would increase to 424,000 net acres, a 78% jump to its existing leasehold. Additionally, Yates has 138,000 net acres in New Mexico's Northwest Shelf, prospective for the shallow Yeso, Abo, Wolfcamp and Cisco formations.
The combination also would add 200,000 net acres to the Powder River portfolio, doubling EOG’s position. Included are 81,000 net acres in the prospective Turner Oil play.
Yates CEO Douglas E. Brooks said the merger offered "a tremendous opportunity to combine EOG's strong technical competencies with the enormous resource potential of the Yates acreage to create significant value for Yates and EOG shareholders alike."
Yates immediately adds an estimated 1,740 net drilling locations in the Delaware and Powder River to EOG's growing inventory of "premium" drilling locations, a 40% increase, EOG management said. EOG defines a "premium" drilling location as a direct after-tax rate of return of at least 30%, assuming a $40/bbl flat crude oil price. EOG plans to begin drilling on the Yates acreage later this year and add rigs in 2017.
"Through this transaction, our premium drilling strategy is gaining added momentum," Thomas said. "With improving well productivity and this newly enhanced resource base, our organization can generate further increases in returns and capital efficiency. The combination enhances the size and quality of EOG's existing portfolio of oil resource plays."
Still to be determined is the impact of Yates on EOG's future output and growth.
During the 2Q2016 conference call last month, Thomas said EOG expected to increase its oil production at a 10% compound annual growth rate (CAGR) at $50/bbl oil (see Shale Daily, Aug. 8). At $60/bbl oil, the CAGR jumped to 20%. Those estimates did not include any of the Yates position, but the Delaware inventory climbs to the top of the heap, he told analysts.
The Delaware acreage "is very, very high quality, and it fits in and joins our positions very strongly...We can take extreme benefits from the combination infrastructure and operational synergies going on in the area."
EOG initially estimated Yates would bring with it 1,700 identified "premium" drilling locations. "But that's just the first pass," Thomas said. "We believe that as time goes on, we can convert more at a premium…” The Delaware has “potential from a rate of return” aspect “and is right at the top of our list to begin drilling."
Capital expenditures for 2017 are to remain "fairly low" for the Yates acquisition, although guidance may be updated during the 3Q2016 conference call. "But as we go forward into 2017, we'll be adding capital to the Delaware,” Thomas said.
Not every piece of Yates is expected to be kept. There's a potential for asset sales, but those would be for assets outside the Delaware, he said.
EOG agreed to issue 26.06 million shares valued at about $2.3 billion and pay $37 million in cash in exchange for the portfolio, which includes Abo Petroleum Corp. and Myco Industries Inc. EOG also agreed to assume and repay at closing $245 million of Yates' debt, offset by $131 million of anticipated cash.
Tudor, Pickering, Holt & Co. (TPH) estimated EOG was paying about $7,000-8,000 for the Delaware acreage. Assuming $800 million of proved developed producing reserves value for current output of 29,800 boe/d, 48% weighted to oil, TPH analysts said EOG also paid about $500/acre for the Powder River leasehold and $1,500/acre for the Northwest Shelf land.
Coker Palmer Institutional (CPI) sees the Delaware land worth even more. "Just valuing the Delaware, EOG paid $9,600/acre, assuming $30,000/flowing boe (48% crude)," CPI analysts said in a note. That price would compare with the average $12,800/acre for other recent Delaware transactions (assuming $35,000/flowing boe). And with 1,700 "premium" wells and 424,000 total Delaware acres, "EOG is starting to build a substantial 'second leg' of the story to the 550,000 core Eagle Ford assets," CPI analysts said.
The boards of both companies have approved the combination, which is expected to be completed in October. EOG is planning to maintain the Yates office in Artesia to support the newly combined operation.