Energen Corp. (EGN) wants to ramp up drilling in the Permian and is also on the lookout for acquisitions, the company said June 17.

Energen is selling 5.7 million shares of common stock for gross proceeds of $405 million. The Birmingham, Ala., company said the net proceeds could fund:

  • A more significant acceleration of 2016 Permian development, where capital investment will be $1 billion or more;
  • A slight increase in Midland Basin drilling activity in the second half of 2015;
  • Money from the offering may be used for other general corporate purposes, including the acquisition of proved and unproved leasehold; and
  • Some gains on the sale may repay down debt.

Gabriele Sorbara, analyst, Topeka Capital Markets, said Energen’s offering was not a surprise, since it was one of the few if only Permian E&Ps that had not made an equity offering.

The secondary offering—meaning the first since its IPO—could go up to 6.6 million shares at $71.05 per share if Energen exercises an option to sell more stock. In that scenario, net proceeds could rise to $465.7 million.

“From a share count perspective, this represents 7.8% dilution, potentially 9% with the overallotment,” Sorbara said. The offering should strengthen Energen’s balance sheet to one of the “best in the industry.”

Investors should “take advantage of today’s weakness on the secondary offering, as the company has an expanding asset base with the stacked-pay potential of the Permian Basin,” Sorbara said.

After the offering closes, Sorbara estimated Energen’s liquidity will total $1.59 billion with $1.3 billion in available borrowing power and $310.5 million cash on hand.

Energen controls 113,297 net acres in the Delaware Basin, 68,000 net in the Midland and 91,000 net in the San Juan Basin.

On June 16, Energen further propped up its position by adding oil hedges in 2016 for 1.1 million barrels (bbl) of oil production at $63.80 per barrel. It also hedged another 2.9 MMbbl of oil production for July through December at $62.46.

The company continues to build out a solid hedge position for oil production amid a volatile oil price environment to enable stable cash flow, said John Freeman, analyst, Raymond James.

“By our estimates, Energen currently has 78% of its 2015 oil production hedged at an average price of $83.70/bbl, including recent additions,” Freeman said. “The company can focus on improving drilling efficiencies and growing production to drive earnings growth, rather than bet on an oil price recovery.”

Credit Suisse Securities (USA) LLC is acting as sole book-running manager for the offering. The offering is expected to close on or about June 22.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.