Overnight successes are overrated or, at best, misleading. The idea that the Stack is a shale-play prodigy is partly the result of headline-grabbing megadeals and partly companies’ realization that buyers are moving fast to lock up acreage there.
Since Devon Energy Corp.’s $1.9 billion agreement to buy Felix Energy LLC’s Anadarko Basin holdings in December, only the Permian Basin has rivaled the Stack for the industry’s affections (meaning money).
At the start of May, Newfield Exploration Co. rejoined the action. The company bought 42,000 net acres in the Stack from Chesapeake Energy Corp. for $470 million. Newfield’s deal expands the company’s Stack footprint to 265,000 acres.
“When you think about the number of rigs that are running and the amount of capital going into the play today, it’s giving you a pretty good indication of the economics,” said Steve Campbell, Newfield’s vice president of investor relations.
The company hasn’t been an Anadarko raider; rather, its initial leasing program started five years ago. “Newfield was the founder and discoverer of the Stack play,” Campbell said.
He sees recent transactions and robust activity involving 35 rigs as signs the play is being locked up.
“The window is quickly closing for any remaining acreage grabs, and this happened to be a package of assets that fit us extremely well when you look at the footprint and the overlap,” he said. “The play has quickly moved from concept and idea to capture, and now companies have established the large, meaningful HBP areas.”
Chesapeake’s move was a necessity, as it cuts back on debt through asset sales. The company has already hit its low-end estimate of $1.2 billion in divestitures thanks to the sale of its Stack acreage.
The company parts with a chunk of acreage that it clearly liked but ultimately assessed from a best-use point of view.
“We really like the Stack,” Chesapeake CEO Doug Lawler said in a conference call. However, considering “the amount of funding we were going to put toward it in the near term, [the immediate] value acceleration opportunity was just compelling.”
Chesapeake isn’t leaving the Stack, however. It holds 52,000 net acres there and still has 1.5 million acres in the Midcontinent. The sale also won’t affect the company’s borrowing base.
Lawler said that Chesapeake sees the play as highly economical at today’s prices, but the portion it sold fell squarely in line with the company’s divestment criteria: undeveloped, primarily nonoperated acreage.
“It is highly accretive and allows us to direct cash to our balance sheet, creating greater value for our shareholders,” Lawler said.
Campbell said Newfield and Chesapeake accommodated one another’s needs.
Newfield’s purchase was about strategy. About 25% of the 42,000 acres have a direct overlapping interest with Newfield while the other acreage pushes the company west. It had raised $775 million in equity in February and was ready to execute a deal.
“You had a company that had a need to sell assets, and you had a company like Newfield that was financially able to acquire those assets and pay cash and close quickly,” he said. Newfield has committed the lion’s share of its capital budget to the play.
“We’ve made a decision to sell strategic assets within our own portfolio that will allow us to capture opportunistic deals like you saw [on May 4] as well as accelerate our activity when we get the right commodity price signals,” Campbell said. “It’s all about rate of return and accelerating into the highest-return asset in the company.”
Campbell noted that Newfield’s initial well in 2011 was the start of more than 100 it has drilled since. The company’s production in the basin is about 80,000 barrels of oil equivalent per day.
Newfield isn’t opposed to more acquisitions; they just seem less likely now. “We’re interested in everything that’s within our key basins at the right price, but our plate is pretty full with today’s acquisition,” he said.
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