Investors apparently approved of Philadelphia-based Atlas Resource Partners LP's deal to acquire 277 Bcfe of proved reserves, including undeveloped drilling locations, in the Barnett Shale from Carrizo Oil & Gas. Atlas shares closed up 32% Friday following the deal's announcement.
"This transaction is the first step in the execution of our growth strategy for [Atlas]," said CEO Edward E. Cohen. "These Barnett Shale assets are ideal: long-lived, producing assets which generate increased cash flow and distributions per unit."
Atlas is to pay about $190 million, or 69 cents/Mcfe, it said. The deal is expected to close in late April with an effective date of Jan. 1, 2012. The transaction is expected to be immediately accretive to Atlas adjusted earnings and distributable cash flow. Atlas raised its distribution guidance for the second half of 2012 from 80 cents/unit to a range of 85-90 cents/unit.
Wells Fargo Securities analyst David Tameron said in a note Friday that the deal "marks a low point in natural gas Barnett M&A, at least for public companies." Tameron valued the deal at about $5,300/Mcfe/d, 61 cents/Mcfe of proved reserves.
"For comparison purposes, last April [Carrizo] sold 8 MMcfe/d of non-operated production and 122 Bcfe of reserves to KKR for $104 million, which equated to $12,530/Mcfe/d and 85 cents/Mcfe proved [see Shale Daily, April 29, 2011]. Natgas prices averaged $4.15/Mcfe for the 30 days prior to that transaction compared to $2.29/Mcfe for the 30 days prior to this transaction," he said.
"Doesn't bode well for natural gas names, but particularly [Quicksilver Resources], in our view, given Barnett exposure."
The acquisition includes 198 gross producing wells on more than 12,000 net acres. Reserves are 99% natural gas with 52% proved developed. Current net production is about 36 MMcfe/d, and the reserves-to-production ratio is 20 years, Atlas said.
Estimated total proved reserves as determined by Carrizo's third-party engineer at year-end 2011 were 312 Bcfe (177 Bcfe of proved developed and 135 Bcfe of proved undeveloped reserves), of which 53 Bcfe are non-operated.
Atlas shares blew past their previous 52-week high of $23.90, hitting an intraday high of $30.20 before falling back to close at $28.31 for a gain on the day of 31.6%. Volume was more than 13 times the norm. Carrizo closed up 1.1% at $30.01/share. Investors were favoring energy stocks on Friday following a White House announcement that the Obama administration did not plan to tap the Strategic Petroleum Reserve in order to lower gasoline prices.
Houston-based Carrizo said it intends to use the net proceeds from the sale to repay borrowings under its revolving credit facility and use the excess proceeds to partially fund its 2012 capital expenditures plan, largely in the Eagle Ford Shale of South Texas. Carrizo estimates that when its borrowing base is redetermined (scheduled for April) it will be about $300 million after adjustments.
"Our corporate strategy has been to focus our capital expenditures on the highest-return plays such as our liquids-rich Eagle Ford and Niobrara properties," said Carrizo CEO Chip Johnson. "We have significantly slowed the pace of development of our dry gas properties in the Barnett Shale due to low natural gas prices. However, we had several strong indications of interest in this quality gas asset and are pleased to be able to announce this sale to Atlas.
"The resulting increase in liquidity generated by the sale of these properties will increase our flexibility to fund our announced 2012 capital investment plan that is focused on investment in liquids-rich resource plays while maintaining appropriate debt levels on our revolver."
Tameron said in a research note on Carrizo that the transaction price is "dilutive on [a] snapshot basis but likely longer term accretive given reinvestment opportunities."
Tameron said the properties Carrizo sold likely would not have been drilled by the company "given the uncompelling economics." He added that the deal takes pressure off of the company to do a joint venture to exploit its Niobrara acreage.
To pay for the acquisition Atlas placed $120 million of equity with institutional investors representing six million common units at $20 each. It also borrowed $70 million from its credit facility. Atlas said it expects its lending group will expand its revolving credit line to a borrowing base of about $250 million.
Atlas said it intends to hedge 100% of its available acquired production for the following 12 months, using a combination of swaps and puts. ARP intends to hedge 80-100% of its available production for the subsequent four years.