Contango Oil & Gas Co. (NYSE: MCF) is making its debut in the crowded Permian Basin following a deal for a piece of West Texas acreage worth up to $25 million.

The Houston company said July 21 it entered an agreement with a private oil and gas company to acquire Southern Delaware Basin assets in Pecos County, Texas. The purchase consists of one-half of the seller's interests in about 12,100 gross (5,000 net) undeveloped acres.

Contango has been on the hunt for deals in the Permian—holding back on capex to make a deal—and has talked to portfolio companies, including firms on the Gulf Coast, according to Seaport Global Securities.

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Contango’s acquisition includes about 157 gross potential locations in the Wolfcamp A and B and Bone Spring formations, which the company plans to start drilling before the end of the year, said Allan D. Keel, president and CEO.

“This new Permian presence provides a multiyear inventory across a stacked pay formation that we expect to commence drilling in September or October of this year with our existing staff,” Keel said in a statement.

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The locations are estimated to generate average individual well returns of 54%, at current strip prices and estimated costs using internally estimated average production type curves. Estimates assume drilling of 10,000-foot laterals.

Contango will hold about 41% operated average working interests and 32% net revenue interest in the acquired acreage. The deal also includes existing infrastructure in place.

The purchase price is comprised of $10 million in cash at initial closing and $10 million in carried well costs expected to be paid over the next 14 months. Certain additional contingent payments upon success would increase total consideration to $25 million.

“The unique deal structure of part cash, part carry and part success fee gives us some financial flexibility and allows us to grow production, cash flow and reserves through a capital program that is expected to be funded with internally generated cash flow,” Keel said.

Contango plans to fund its acquisition with proceeds from an equity offering of 5 million shares with a 750,000 share greenshoe. RBC Capital Markets, SunTrust Robinson Humphrey and Seaport Global Securities are joint book-running managers for the offering.

The purchase is subject to finalization of title due diligence and customary closing conditions and adjustments with an initial closing expected later this month. The company’s equity offering is not conditioned on the consummation of the acquisition.

Emily Moser can be reached at emoser@hartenergy.com.