Houston-based Carrizo Oil & Gas Inc. agreed to nearly double its West Texas Permian Basin portfolio in a $648 million deal with private equity-backed Exl Petroleum Management LLC.

The Quantum Energy Partners portfolio company agreed to sell Carrizo 23,656 gross (16,488 net) acres in Reeves and Ward counties, considered to be the heart of current exploration and development within the Bone Spring and Wolfcamp formations.

Carrizo’s position in the Delaware would jump to more than 42,500 net acres with the acquisition. It would have operational control of 95% of the new acreage, with an average 70% working interest.

"Over the past couple of years, we have evaluated numerous deals in the Delaware Basin, and these properties rank amongst the best we have evaluated, meeting all of our acquisition criteria,” said CEO Chip Johnson. “The assets are located in the core of the Delaware Basin, offering the potential for decades of high-return drilling locations across multiple horizontal zones. Additionally, the properties have a significant amount of well control, not just across the acreage, but also within the various target zones, dramatically reducing the future operational risk.

"With this acquisition, we believe we have assembled core positions with a deep inventory of future drilling locations in two of the highest-return plays in North America, the Eagle Ford Shale and Delaware Basin.”

Quantum partnered with ExL in late 2014 to acquire and develop properties across the Permian. The Midland, TX-based operator today targets acquisitions in West Texas.

Carrizo, which today is focused mostly on its Texas projects in the Eagle Ford Shale and Delaware, plans to monetize some of its other U.S. onshore holdings, including the Appalachian portfolio, which includes Marcellus and Utica shale holdings. The company expects to gain at least $300 million from planned sales.

In part because of lease obligations, Exl now is running four operated rigs across its position, with net output averaging 8,000 boe/d net, 67% weighted to natural gas liquids and 48% to oil.

More than 350 net potential locations have been identified in the Wolfcamp A and B formations, with initial projected average/well estimated ultimate recoveries of 1.3-1.5 million boe.

Exl is producing from 11 gross horizontal wells, with seven more wells now being drilled, completed or in flowback.

Beyond 2017, Carrizo expects two rigs can manage leasehold obligations on the acreage; the preliminary development plan once the purchase is completed assumes three rigs.

Based on the level of activity required to manage the near-term leasehold obligations, Carrizo plans to move one of its Eagle Ford rigs to the Delaware once the acquisition is completed.

Future wells should have average lateral lengths of 7,300 feet, with more than 40% of the acreage able to support 10,000-foot laterals, Carrizo said.

Carrizo, which expects to complete the transaction by mid-August, agreed to pay $648 million cash and pay Exl contingency payments from 2018 to 2021 if West Texas Intermediate crude oil averages more than $50/bbl in any calendar year. The agreement would provide up to $50 million/year with a maximum additional payment of up to $125 million.

Carrizo’s financial adviser was Citigroup, while Baker Botts LLP served as legal adviser. RBC Capital Markets acted as Exl’s financial adviser.

Based in part on better-than-expected performance from the Eagle Ford, Carrizo has increased its 2Q2017 production guidance for crude oil to 33,600-33,700 b/d from 31,800-32,300. For natural gas, second quarter guidance has been adjusted to 71-73 MMcf/d, with natural gas liquids guidance revised to 4,700-4,800 b/d.

Full-year crude oil production guidance also has been raised to 35,700-36,000 b/d from 32,400-32,700. Using the midpoint of the range, the new guidance increases to 39%.

Total output this year is expected to average higher at 54,933-56,100 boe/d from 49,533-50,700.

The development plan for 2017 has been reduced in the Eagle Ford to 75 net wells from 91, while in the Delaware the plan is to drill 17 net wells versus earlier guidance of six.

Carrizo expects to complete 84 net wells this year in the Eagle Ford, with 17 net completions in the Delaware. The operator did not provide guidance for the Niobrara formation nor for Appalachia.