The E&P independent that’s shelling out a hefty $1.38 billion for additional Bakken-Three Forks properties in North Dakota’s Williston Basin is shopping for more “bolt-on” acquisitions in the region, as it continues to emphasize oil over a sagging natural gas market.
“A very wise man once said you look at every deal in the areas in which you operate. We’re never done; we’ll continue to look,” Chuck Stanley, chief executive officer of Denver-based QEP Resources, Inc., told analysts during an August 24 conference call.
QEP’s new package, among the largest Bakken deals of the year, involves “multiple sellers,” including Black Hills Corp. of Rapid City, S.D., Unit Petroleum Co. of Tulsa, Okla., and Australian-based Sundance Energy.
The acquired properties, primarily made up of a contiguous block of acreage located in Williams and McKenzie counties, are situated just 12 miles west of QEP’s existing core acreage. The properties are largely held by production, fully delineated and characterized by strong well results, QEP said.
QEP enters Bakken in 2008
QEP, spun off from Salt Lake City-based Questar Corp. in 2010, entered the oil-rich Bakken play in 2008. Like many other E&P independents, dwindling natural gas prices have pushed QEP to shift its focus to more lucrative oil and natural gas liquids. In this year’s second quarter, natural gas prices fell 46 percent from last year to average $2.40 per million British thermal unit.
However, though QEP continues to shift its emphasis to oil, the company said it hasn’t given up on the gas market.
“A lot … depends on how much capital we keep away from dry gas development over the next three or four years, and that’s a question that is highly dependent on gas prices,” Stanley said. “But as gas prices improve, and we believe they will over time, because we still think there needs to be dry gas development in order to balance the market long term, then we will shift some capital back to the gassier portions of our portfolio.”
QEP, with reported 2012 second-quarter revenue of nearly $500 million, operates in two major U.S. areas: the Northern Region, consisting primarily of the Rockies; and the Southern Region, consisting of property located mainly in Oklahoma, Louisiana and the Texas Panhandle. The company also gathers, compresses, treats, processes and stores natural gas.
In the Williston Basin, QEP currently operates 37 producing wells, including 31 Bakken wells and six Three Forks wells, and has a working interest in 118 producing outside-operated wells. During the second quarter, the company’s Bakken-Three Forks net production averaged 6,088 barrels of oil equivalent per day.
The acquisition will provide QEP with an additional 10,500 boe per day of production and proved and probable reserves amounting to about 125 million boe. Roughly 27,600 net acres came with the deal, which are predominantly fee simple mineral leases.
The Bakken and Three Forks formations are both prospective across all of the acreage and will be developed by separate horizontal wells targeting each formation, QEP said, noting that there’s an aggregate of 72 gross (29 net) developed locations and 301 gross (146 net) undeveloped locations.
QEP to operate 90 percent of acreage
Moreover, about 90 percent of the net acreage being acquired will be operated by QEP. The acreage is presently operated by Helis Oil & Gas Co. LLC, of New Orleans, La., an affiliate of Black Hills Corp. However, the non-operators were allowed to combine on the sale and receive the operator premium per acre for all of their acreage.
“This transaction highlights how the perception that non-operated acreage is not nearly as valuable as operated acreage, even when it is the exact same acreage, can be erroneous,” Seeking Alpha said of the deal on its website.
The stars were perfectly aligned for this deal, meeting all of the company’s internal requirements for a large transaction, QEP said.
“There are very few black oil producing basins or provinces in the U.S. and we’re focused on those,” Stanley said, noting that the acreage it is acquiring in the Bakken petroleum system consists of 81 percent oil, 9 percent natural gas liquids (NGL) and 10 percent natural gas.
Second, QEP concentrates on tight carbonate sands in unconventional reservoirs, not on shales for oil plays, and questions how well shales work as a crude oil reservoir over the long term.
“We like tight carbonate sands because we can map the extent, thickness and quality of reservoir rock as well as map the oil, gas and water content in each of the reservoirs,” Stanley explained.
Best reservoirs targeted
Third, the company identifies the best reservoirs in the targeted basins, Stanley added, noting, “Superior execution won’t overcome poor marginal reservoir rock.”
“All resource plays have sweet spots that make up, from our studies, a surprisingly small percentage of the overall acreage in resource plays, and we think we can identify the best rock by detailed mapping and geological studies, but that is not enough,” he said. “You also need to see superior well performance.”
For long-lateral wells drilled on the acquired property after January 1, 2010, the average estimated ultimate recovery, EUR, for the Bakken is 1.16 million boe, while the average EUR for the Three Forks is 990,000 boe — both above average for the region.
Fourth, QEP targets stacked reservoirs in horizontal plays, which increase well delivery efficiency and lowers operating costs.
Stacked reservoirs save money
“Multiple reservoirs means that you can go after these targets with pad drilling,” Stanley said. “More hydrocarbon in place from stacked reservoirs means less infrastructure cost, lower operating costs and higher margins.”
Fifth, the company focuses on basins where QEP already has an operating presence, because “there’s really no substitute for having boots on the ground,” Stanley said.
“That means you have a familiarity with the on-the-ground challenges and opportunities for efficiency gains,” he said. “We already have relationships with quality service providers in areas where we operate and we can leverage this presence to get economies of scale in both drilling and completion and production operations.”
Last, Stanley said QEP focuses on operated contiguous “chunky” acreage positions in both its leasing and acquisitions to create core areas.
“Why do we do this? Because resource plays dictate contiguous QEP-operated acreage to achieve economies of scale. And, of course, a concentrated footprint of acreage minimizes the investment in gathering facilities and other work and drives long term operating efficiencies.”
Bakken a ‘tremendous opportunity’
“In summary, we think this acquisition represents a tremendous opportunity to apply our core skills to an extremely high quality set of assets that drive profitable crude oil production growth for QEP.”
QEP is paying a rich valuation for the acquired properties that bode well for other players in the region, analyst Gabriele Sorbara of Imperial Capital said in a note to clients.
“This acquisition is a positive read-through to the pure play Bakken players, which we believe are takeout candidates,” Sorbara said, noting that Oasis Petroleum and Triangle Petroleum appear to be among the most attractive candidates for a buyout deal on the heels of the QEP transaction.
However, the deal also substantially raises QEP’s debt to $3.16 billion from $1.72 billion, representing a debt-to-capital ratio of 48 percent, compared to 34 percent before the transaction.
QEP said it has sufficient cash and availability under its $1.5 billion revolving credit facility to close the transaction and continue to have ample working capital to run the business.
$1.59 billion to develop property
QEP increased its capital investment guidance for this year’s fourth quarter — the first quarter that includes the acquisition — by $50 million. The company estimates future net development capital for all acquired assets to be $1.59 billion.
“Obviously funding a large acquisition with mostly debt will increase our leverage statistics,” Richard J. Doleshek, QEP’s chief financial officer, told analysts on the call. “While we are happy to live (with) higher leverage levels … this is not where we want to be on a long terms basis. So you should not be surprised to see us engage in some sort of de-leveraging activity.”
QEP declined to say just how the company intends to reduce its large debt. But joint ventures and property sales likely would be on the list of possibilities. “We’ll keep you (posted) on what form this might take,” Doleshek noted.
QEP said it was expecting the transaction to close around the end of the third quarter.
Two rigs included in deal
The deal also includes two drilling rigs, which QEP plans to keep running through at least the end of the year, along with three rigs working existing company acreage.
“Our current thoughts are that we’ll be ramping up activity on the newly acquired acreage next year, up to about five rigs,” Stanley said. That would give QEP a total of about eight rigs operating in the Bakken.
In total, there are 24 operated spacing units with an average gross working interest of 82 percent on the acquired property, and 27 non-operated spacing units with an average gross working interest of 10 percent.
The acquisition will increase QEP’s net acreage in the Williston Basin to about 118,000 acres from 90,000 acres.
Property sells for $243 million
Black Hills Corp. subsidiary Black Hills Exploration & Production, Inc., is selling about 85 percent of its Bakken and Three Forks shale assets in the Williston Basin to QEP for roughly $243 million. The sale includes all of Black Hills’ interests in the Williston Basin assets owned jointly with operator Helis.
As of the end of the second quarter, net year-to-date production from Black Hills properties totaled about 149,000 barrels of oil and 171,000 cubic feet of natural gas. Total proved reserves for the properties, as of December 31, 2011, were 2.2 million barrels of oil and 3.4 billion cubic feet of natural gas.
“The divestiture of these assets has effectively and immediately captured the future potential value that we projected for this portion of our oil and gas portfolio,” said David R. Emery, chairman, president and chief executive officer of Black Hills.
Black Hills Exploration operates oil and natural gas producing properties in Colorado, New Mexico and Wyoming, and has non-operated interests in properties producing in California, Montana, North Dakota, Oklahoma, Texas and Wyoming.
Black Hills Corp., a diversified energy company, serves 765,000 natural gas and electric utility customers in Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming.
Sundance pulls $150 million profit
Sundance Energy Australia sold its interest (3,900 acres) in the South Antelope oil field, which produces from the Bakken formation, for $172.4 million. This represents a profit of $150 million and gives the company a return of three times its total investment, or an internal rate of return of about 75 percent over the roughly five-year life of the project, Sundance said.
Sundance still holds other Bakken assets including stakes in the Phoenix, Goliath and Manitou projects. Sundance Energy’s interest in South Antelope held proved, probable and possible reserves of 12.2 million barrels of oil equivalent as of 30 June 2011 and produced 500 boe per day. Three recent wells in South Antelope had produced oil at initial rates ranging from 1,444 boe per day to 1,779 boe per day.
Sundance Energy Australia’s U.S. subsidiary, Sundance Energy Inc., is located in Colorado. Its primary focus is on large, repeatable resource plays from which it develops and produces oil and natural gas reserves from unconventional formations.
Unit receives $268 million
Unit Corp. announced it would receive $268 million for two separate transactions, including the QEP transaction and another in Texas, for an undisclosed acreage position and 1,200 boe per day in total production.
“This is an important step that will create additional liquidity for future acquisitions and development in our core areas,” said Larry D. Pinkston, Unit’s president and chief executive officer. “These transactions are part of non-core divestitures that Unit has been pursuing.”
