Pennsylvania-based producer Rex Energy Corp. said Tuesday it will partner in the Marcellus Shale with a subsidiary of Japan's Sumitomo Corp. in a transaction expected to pay dividends for years to come.
Under the joint venture (JV) agreement, Rex agreed to sell and transfer interests in its Marcellus Shale assets in several areas of Pennsylvania to Sumitomo subsidiary Summit Discovery Resources II LLC. In Butler County Rex would sell Sumitomo 12,900 net acres, wells and associated midstream assets for about $88.4 million in cash and an additional $52 million in a drilling carry. Rex would continue to serve as the operator; the transaction is expected to close by the end of September.
"Upon closing this deal, we will once again be debt free with substantial cash on hand," said Rex CEO Benjamin W. Hulburt. "We believe that this will enable us to continue to aggressively develop our assets, while maintaining one of the cleanest balance sheets in the industry. With approximately 91% of our capital being invested in oil and liquids rich gas assets, combined with our debt free balance sheet, we strongly believe we are very well positioned to prosper in the current commodity price environment."
The JV would give Sumitomo a 15% nonoperated interest in 42,200 gross (41,200 net) acres in Butler County for $61.6 million ($10,000/acre). Half of the purchase price is to be paid in cash at closing, with the remaining half paid in the drilling carry. In connection with the transaction, the parties agreed to form an area of mutual interest (AMI) in Butler County, and once the sale is completed Rex would own about 34,900 net acres within the Butler County AMI.
Sumitomo also agreed to pay all of the costs to lease about 9,000 net acres in the Butler County AMI (Phase I), and agreed to pay a leasing management fee of $1,000/acre net during the Phase I leasing. Once Phase I leasing is completed, Rex and Sumitomo would "cross assign interests in the leases to provide a uniformity of interest in each lease" within the AMI. Assuming the full 9,000 net acres are leased, the final ownership percentages would be 70% Rex, 30% Sumitomo.
Rex also agreed to sell 30% of its interests in 20 Marcellus wells within the Butler County area, including 11 wells in progress, for close to $19.1 million. Sumitomo also is acquiring a 30% stake in Rex's Keystone Midstream Services LLC, a midstream joint venture with Stonehenge Energy Resources LP, as well as an existing refrigeration plant, for $3.9 million.
In JV project areas operated by Williams Production Appalachia LLC, Rex agreed to sell 20% of its 44,200 gross (22,100 net) acres for $35.9 million ($8,115/acre net). Once the sale is completed, Rex would own about 6,700 net acres within the Westmoreland County AMI, and 11,000 net acres within the Central Pennsylvania AMI. Rex also is selling a 20% stake in 19 Marcellus Shale wells within the Williams JV areas, including five wells in progress, for $5.7 million, and 20% of its interests in the Williams JV midstream assets.
Sumitomo also gains a half-stake in 4,600 net acres in Fayette and Centre counties for $18.5 million ($8,115/acre net). Under the agreement, the drilling carry for these areas may be applied, at Rex's discretion, to drilling and completion costs attributable to either the Butler County or Williams JV areas. After the sale is completed Rex would own about 2,300 net acres in these areas.
Rex said its bank group unanimously agreed to increase the company's borrowing base under its senior credit facility to $125 million from $100 million after taking into account the JV transactions with Sumitomo. The lenders also agreed to extend the maturity date under the senior credit facility by one year to September 2013. As of Tuesday Rex had $65 million of debt under the senior credit facility, with an estimated $9.4 million in cash on hand. At closing, the company expects to repay all of its borrowings under the senior credit facility and have an estimated cash balance of $21.2 million.
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