Vanguard Natural Resources LLC last week agreed to pay Bill Barrett Corp. $335 million to buy natural gas and natural gas liquids (NGL) assets in Colorado's Piceance Basin and in the Powder River and Wind River basins in Wyoming.
"These assets will be a great addition to our portfolio as they exhibit the characteristics we are looking for: a mature developed production base, predictable operating costs and significant free cash flow with very limited need for reinvested capital based on our acquisition structure," said Vanguard CEO Scott Smith. "...[W]e are on track to invest over $800 million in oil and gas assets in 2012. These acquisitions will drive our production and distribution growth as we head into 2013."
Vanguard is getting proved reserves of about 300 Bcfe and current net production of about 65 MMcfe/d in the deal, which is expected to be immediately accretive to distributable cash flow. "Proforma for the acquisition, our total proved reserves will increase by approximately 36% with the product mix being 61% natural gas 24% oil and 15% NGLs," Smith told analysts during a conference call. "Over 70% of the total reserve base will be in the proved developed category."
The deal includes all of Bill Barrett's Wind River gas producing properties, Powder River Basin coalbed methane assets and a working interest in its Gibson Gulch-Piceance Basin development property.
"...[T]he monetization of noncore, lower-growth assets is part of a prudent long-term strategy to optimize our portfolio and focus investment dollars in programs that offer the highest returns and best long-term growth profile," said Bill Barrett CEO Fred Barrett. "...[B]ased on our allocations, this transaction pegs the pre-sale market value of our Gibson Gulch asset at approximately $1 billion, which I believe has not been recognized in the market. Proceeds will be applied to debt reduction in the near term and to fund our low-risk reinvestment opportunities."
Early this year Bill Barrett executives talked up an increased emphasis on oil and natural gas liquids (see NGI, Jan. 30). BMO Capital Markets analyst Dan McSpirit wrote last Thursday that the asset sale will help focus Bill Barrett's drilling effort while deleveraging the balance sheet and replenishing liquidity. "We also like the pursuit of higher-margin growth and emphasis on exploration..." Wells Fargo analyst David Tameron agreed with Barrett that the value of the assets sold was not being recognized by investors.
The reserves-to-production ratio of the assets Vanguard is acquiring is estimated at 13 years. There are abut 184,000 net acres in the Wind River Basin, 97% undeveloped, 12% held by production (HBP) with the majority of leases expiring in 2015 and beyond. And there are 67,000 net acres in the Powder River Basin, 42% undeveloped, 93% HBP; and 4,000 net acres in the Piceance Basin, 37% undeveloped, 95% HBP, according to Vanguard.
Vanguard will have an escalating working interest in the Gibson Gulch assets in the Piceance Basin, where Bill Barrett will retain operatorship. The working interest begins at 18% and increases to 21% on Jan 1, 2014 and then increases to 24% on Jan. 1, 2015, Vanguard said. It increases to 26% Jan. 1, 2016 and remains at that level. "This structure was designed to maintain cash flow from the acquisition without the need for any capital spending until 2016," Vanguard said.
Bill Barrett said it will retain all of its leases in its emerging Powder River Basin Deep stacked oil play and has the right to propose farmouts, under predefined terms, on the Wind River Basin properties to leverage its experience in this area for exploration upside potential.
Vanguard said it intends to hedge expected gas and oil production through 2016 and expected natural gas liquids production in 2013. It said it will expand the Wyoming operating base with the addition of two offices and personnel to handle the Wind River and Powder River operations. "By hedging natural gas at increasing strip pricing each successive year and having an increased working interest each successive year in the Piceance Basin, we offset the impact of the expected natural production declines and consequently, the cash flow remains relatively stable through 2016."
A "significant number" of proved drilling locations in the Piceance can be drilled at attractive rates of return in a $4.50 natural gas price environment, Vanguard said. "In addition, there are a significant number of proved drilling locations in the Powder River Basin that are not economically attractive at current strip pricing but would be viable projects in an improved pricing environment," the company said.
In June Vanguard bought Antero Resource's mostly natural gas Arkoma Basin assets for $445 million, establishing a new operating area with the deal (see NGI, June 11).
On the conference call last Thursday, Smith enthused about the buyer's market for gas assets.
"We believe in the current pricing environment, it's a great time to buy quality natural gas assets," he said. "If you look at where gas prices have gone since we closed the Arkoma acquisition, prices have increased from the $2 level that we saw in May to over $3.50 in November, and the corresponding strip prices have increased as well. Simply put, we believe our timing in making these gas-focused acquisitions will prove to be a great strategic decision that will deliver long-term benefits to our unitholders as prices gradually improve."
Vanguard's Bill Barrett transaction is to be effective Oct. 1, 2012 with closing expected by year-end. Vanguard said it will fund the deal with borrowings under its existing credit facility.
Vanguard reported a third quarter net loss of $68.7 million compared with net income of $75.9 million in the year-ago quarter. Adjusted net income was $17.9 million compared with $14.1 million in the year-ago quarter. Third quarter results include a loss of $86.7 million in noncash adjustments. Year-ago quarter results include a $106.9 million gain from noncash adjustments.
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