EP Energy Corp. (NYSE: EPE) entered a joint venture (JV) agreement with a subsidiary of Apollo Global Management to drill up to 150 Wolfcamp wells, the company said in late January.
Apollo will foot 60% of drilling, completion and equipping bills with $450 million in capital. In exchange, subsidiary Wolfcamp Drillco Operating LP (WDO) will earn working interest in the wells, which will be drilled in two 75-well tranches in Reagan and Crockett counties, Texas.
Apollo already owns about 45% of EP Energy’s common stock.
The JV is among recent transactions in which public companies and private-equity firms have collaborated.
On Jan. 12, Sanchez Energy Corp. (NYSE: SN) and private-equity firm Blackstone Energy Partners agreed to purchase Anadarko Petroleum Corp.’s (NYSE: APC) 155,000-net acre Eagle Ford position.
In 2016, PetroQuest Energy Inc. (NYSE: PQ) entered a JV with a group of investors while Gastar Exploration Inc. (NYSE: GST) funded drilling through an agreement with a private global investment firm.
“The JV highlights the value of EPE's southern Midland assets and allows for accelerated activity in 2017 without negatively impacting leverage,” said Scott Hanold, an analyst at RBC Capital Markets LLC.
EP Energy said the deal:
- Enhances program economics, with well-level internal rates of return (IRRs) of more than 80%;
- Supports the Wolfcamp acreage value of $20,000 per acre; and
- Keeps the company in the driver’s seat as operator of the wells.
Brent Smolik, EP Energy chairman, president and CEO, said the JV enables the company to accelerate development of its largest strategic asset in a “balance sheet-friendly manner.”
“During the past year, we significantly increased the value of our Wolfcamp asset with improved well performance, a lower cost structure and reduced royalty rates,” he said. “This new capital commitment further improves and illuminates the acreage value of our Wolfcamp program.”
The JV allows WDO to earn a 50% working interest in each tranche of wells. Once it achieves a 12% IRR on its invested capital, its working interest will revert to 15%.
While the deal preserves EP Energy’s long-term liquidity in 2017 and 2018, the loss of production will be difficult to make up, said Gordon Douthat, a senior analyst at Wells Fargo Securities.
The JV assures that EP Energy will execute on its 55-well requirement in 2017 with University Lands at a lower cost with capex as a percent of cash flow.
With the JV, costs will be 106% of cash flow compared with 136% without, Douthat said.
The company could see a 5% reduction in production due to the working interest requirements.
“We estimate the transaction comes in at $18,000 per acre based on 140-acre spacing and 7,500 ft laterals,” he said.
EP Energy “expects the first 75-well tranche to be completed by fourth-quarter 2017,” Douthat said. The company will have 60 days to propose the second 75-well tranche.
“For five years following the completion of the last well in each tranche, WDO has the option to participate in certain infill wells” that EP Energy will propose.
The first of the JV wells was set to begin production in January.
The transaction was approved by the disinterested members of EP Energy's board of directors, the company said.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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