In a "very significant step-change" that will double its natural gas-heavy reserves, Houston-based independent Edge Petroleum Corp. has obtained a package of wells, natural gas pipelines and related infrastructure, mostly located in its core area of South Texas, for $320 million cash. Together, the wells are producing at a rate of 31 MMcfe/d, of which about 86% is gas.
The private-party acquisition includes properties in 13 counties in South Texas and near Houston. The package includes 143 gross producing wells (72 net) and an ownership interest in 17,000 gross and 11,000 net developed acres and 56,000 gross and 16,000 net undeveloped acres of leasehold, all as of Nov. 1. Edge will be the operator of about 97% of the total production. Another 45-50 Bcfe of additional resource potential is estimated to exist on the undeveloped leaseholds that are being acquired. In addition to the wells, Edge also is acquiring 13 miles of gas pipelines and processing infrastructure.
The seller also is granting Edge 25% of option and leasehold rights to jointly pursue future drilling opportunities in a 95-square-mile 3-D area with 30,000 gross acres of leases and options located in Hidalgo County in South Texas. Edge expects to enter into agreements giving it venture rights to participate in two additional exploratory plays already under development, which cover more than 280 square miles and more than 115,000 gross acres under lease. Its working interest in these two ventures will vary between 12.5-25%.
CEO John W. Elias, who presided over a conference call Friday with his executive team, called the acquisition a "step-change" for Edge. "We're obviously very excited about the known asset base, the undeveloped assets, and the leasehold options. These acquired assets, when ultimately combined with Edge, we believe from internal forecasts and based on current market conditions, that this acquisition provides near- and long-term growth for Edge for some time to come in the long-term." He said the properties together have an expected reserve-to-production ratio of more than nine years.
Elias said it was too early to estimate how big Edge's capital expenditure budget would be in 2007 because the transaction will not close until late January. However, the company plans to expand its hedges related to the production. Edge currently has about 22% of its 2007 production hedged. Current production is about 49.1 MMcfe/d net, with around 85% weighted to natural gas. It has about 135,600 net developed, undeveloped and option acres, and it operates 63% of its net daily production.
Edge has made a couple of strategic transactions in the past couple of years. Most of its exploration properties are located onshore along the Gulf Coast in South Texas, but it also explores along the Mississippi coast onshore, and in the Permian Basin of West Texas and New Mexico (see Daily GPI, Feb. 15, 2005; Oct. 8, 2004).
The acquisition brings with it not only new possibilities, but it also will require a new team of employees, said Elias. Edge plans to hire -- as quickly as possible -- 15 to 20 new employees. The private seller will keep its staff.
"I know there is a high demand for professionals for all disciplines," said Elias. "We have only been using our network to hire people we brought into the organization as opposed to a search firm...but the time required to interview and recruit is very time consuming. We'll look to get help from a variety of sources. We'll need in the neighborhood three to four new exploration, two to four engineering personnel, three additional landmen, five or six additional financial, accounting area people..."
Elias said Edge also will be trying to find another person for its business development and planning area "because we are growing organically, and it looks like we'll have the opportunity to extend our existing base and a big opportunity to grow the company further."
Raymond James energy analyst Wayne Andrews called the purchase "an excellent transaction." Edge has stayed "very busy" in South Texas, where most of the new assets will be located. Andrews thinks it is key that the producer is "sticking to the knitting in the backyard."
Energy analyst John Gerdes of SunTrust Humphrey/Robinson said the "deal...results in a proven reserve purchase multiple of $3.05/Mcfe and a production rate multiple of 10.3. This acquisition appears comparable to precedent M&A [merger and acquisition] transactions...This transaction should be solidly accretive to value."
Edge plans to fund the transaction with a combination of debt and new common equity. Edge expects to allocate $24 million of the $320 million purchase price to its unevaluated property cost pool and about $7 million to the pipeline and related assets, resulting in an estimated purchase price for total proved reserves of $2.75/Mcfe.
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