Jefferies - MHR - New Divide County High
BUY
Price target $7.50
Price $6.18
Subash Chandra, CFA *
Equity Analyst
(212) 284-2271 schandra@jefferies.com
Eli Kantor, CFA *
Equity Associate
(212) 284-2357 ekantor@jefferies.com
* Jefferies & Company, Inc.
Key Takeaway
Baytex acquisition represents a new high-watermark in Divide County.
Adjusted valuation estimate of $3,200/acre is up 15% from the previous high
(also set by MHR). Deal will be financed initially with second lien debt. E&D
capex budget set to increase 50% with additional capital to be deployed in
Bakken and Eagle Ford. Marcellus drilling to be cut in half.
New Divide County record... MHR has announced a potential $311mm acquisition
for Baytex's (BTE, $49.90, NC) 37.5% non-operated WI in 135,000 gross Divide County,
ND acres. Valuation for the undeveloped acreage appears to be roughly $3,200/acre. The
previous Divide County high of $2,800/acre was set in 2011 by two other MHR transactions.
Our $3,200/acre calculation backs out $150mm for existing production/reserves. We use the
average of $126,000 per flowing boe and $21.60/boe for reserves to arrive at the $150mm
marker. The assets include 965 boe/d (93% oil) of production and 8.6 mmboe of proved
reserves.
Deal yet to be finalized... Samson Resources is the operator of the 135,000 gross acre
position and has the option to participate in the transaction. Current working interest is
split 52.5%, 37.5%, and 10% between Samson, BTE, and MHR. Samson appears to have the
right to participate in 84% of the transaction and must make notification within 30 days of
closing. If Samson does not elect to participate, MHR's Williston Basin position would grow
to roughly 125,000 net.
Increasing the capex budget... the 2012 budget is expected to increase by $75mm to
$225mm if Samson does not participate. Under the new plan, Bakken and Eagle Ford capex
will both double to $100mm each. The revised budget assumes 2-3 net Eagle Ford rigs, 1-2
net Tableland rigs, and 2-3 net North Dakota rigs. The Appalachia budget will be cut in half
to $25mm, which includes 3 net Marcellus and 1 net Utica completion. A Weir number will
be finalized following results from the 4 wells slated to come online this quarter.
High yield offering on the horizon... to help fund the acquisition, retire the existing
$100mm term loan, and finance the capex increase, MHR has secured a $450mm second lien
term loan. Issuance of the term loan will reduce the revolver borrowing base by $37.5mm
to $212.5mm. A high yield offering will be used to retire the new term loan once q1'12
financials have been filed. Current liquidity appears to be roughly $200mm, which includes
$100mm of revolver capacity and $100mm of series D preferred stock availability.
Latest Divide County IP rates... culling the state data, recent Divide county peak month
rates from q4'11 and q1'12 appear to range between 50-750 bbls/d. The wide performance
variation does not appear geographically driven as Continental (CLR, $82.65, Hold)
wells in the southeast are averaging a peak month rate of 236 bbls/d, which is similar
to Samson wells in the central and northern areas. SM's (SM, $64.52, Buy) wells are
consistently solid with peak month rates averaging 480 bbls/d. The company's acreage lies
on the Canadian border in the northern portion of the County. Baytex operated wells are
also in north Divide, but average just 50 bbls/d. |
