Baytex Energy Corp. (NYSE: BTE) said April 18 that its U.S. subsidiary has agreed to sell its non-operated interests in North Dakota’s Williston basin to a subsidiary of Houston-based Magnum Hunter Resources (NYSE: MHR) for $311 million.
Samson Resources Company, the operator of the leasehold, has the option under a mutual interest provision, to participate in the acquisition, which was expected to close on or about May 22, with an effective date of March 1.
The deal, if it goes through, would increase Magnum Hunter’s non-operated working interest in the acquired leasehold from 10 percent to 47.5 percent.
Upon completion of the deal and assuming Samson does not participate, Magnum Hunter would buy 50,400 net mineral acres, primarily in Divide County, that would expand Magnum Hunter’s total Williston basin position to more than 125,000 net acres.
As a result of a successful acquisition, which involved proved reserves of 8.6 million barrels of oil equivalent (93 percent oil) and a production capacity of 1,295 boe per day, Magnum Hunter said it would increase its 2012 capital budget in the Williston basin from $50 million to $100 million, and do the same for Eagle Ford spending, which would have increased its total upstream capex to $250 million, except for the fact the company is reducing its spending in the Appalachia region from $50 million to $25 million due to lower natural gas prices and the delay in completion of planned third party gas processing facilities.
Current net production capacity of the Baytex acreage includes an estimated 350 boe per day that is behind-pipe or waiting to be completed from wells recently drilled on the leasehold acreage.
Baytex will still drill 20-25 North Dakota wells
Calgary-based Baytex, which will use the money from the sale to pay down debt, said the deal would lower its company-wide production in 2012 by only 500 barrels of boe per day to 53,500-54,500 boe. The sale represented about 40 per cent of its current U.S. production, the company said.
“The assets are not a primary focus of our U.S. business unit as they are non-operated and generally have a lower average working interest than our remaining lands,” Baytex said in a press release.
Baytex still plans to drill 20-25 wells in North Dakota this year, its exploration and development budget remaining at $400 million.
In a Reuters article about the transaction, BMO Capital Markets-Canada analyst Gordon Tait was quoted as saying Baytex got good price for the assets: “They got $327,000 per flowing barrel of oil equivalent and Baytex is currently trading at $144,000 per flowing boe.”
A flowing barrel of oil equivalent, Reuters explained, corresponds to a production rate of one barrel of boe per day.
Significant growth platform
“This strategic ‘bolt-on’ acquisition in North Dakota increases our technically focused acreage position to a 125,000 net mineral acreage blocks located in the Williston basin. We will be transitioning from a previously minor working interest position into a significant growth platform targeting the prolific Sanish-Three Forks Reservoir and emerging middle Bakken trends in this region,” Glenn Dawson, president of Williston Hunter Inc., the Magnum Hunter subsidiary that operates in the Bakken, said in a prepared statement.
“Increased capital allocation combined with advancing drilling and completion technology will propel oil production growth for the remainder of 2012 any many years to come for our division. Williston Hunter’s recently executed third party midstream contract to gather and process natural gas liquids will also create current hidden value through material production, reserve and cash-flow additions in 2013,” he said.
Aim to become a drilling factory
According to recent presentations by Magnum Hunter executives, the company is focused exclusively on three of the most prolific unconventional resource plays in the United States:
• South Texas – Eagle Ford Shale
• Appalachia – Marcellus Shale / Utica / Huron / Weir
• North Dakota – Williston Basin / Bakken / Three Forks Sanish / Madison
The company said its strategy is to “create substantial shareholder value through a balanced program of acquisitions of companies and properties and initiation of low-risk development and exploitation drilling, exclusively in unconventional resources plays with an oil or liquids rich focus.”
Magnum Hunter’s goal is to become an efficient “drilling factory” within the three shale resource plays where significant property positions have been assembled.
As of March 31, its proved oil and gas reserves were split Williston 24 percent, Eagle Ford 16 percent and Appalachia 60 percent.
According to April presentation slides on Magnum Hunter’s web page, the highest internal rates of return come from the following liquids plays, per research conducted late last year by Credit Suisse Equity Research: Eagle Ford play, 51 percent; the Marcellus 47 percent; Bakken 34 percent. (See chart adjacent to this article.)
Further, a Williston basin economics slide that included North Dakota and Saskatchewan horizontal wells, at a price of $6.9 million and $3.4 million, respectively, the internal rate of return at $75 per barrel oil was 30 percent for both North Dakota and Saskatchewan, presumably because production was higher from the North Dakota wells.
At $105 oil, the IRR for North Dakota was 61 percent, and 59 percent for Saskatchewan. (See adjacent chart.)
