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In 2012, as Tall City Exploration LLC was formed in the Permian Basin, its founders were already eyeing the exits.
On Nov. 24, the company cracked open the door a little wider, collecting $440 million in cash and notes from American Energy - Permian Basin LLC (AEPB) for Midland Basin acreage.
The deal includes Tall City's 14,000 net acres of leasehold primarily in Reagan County, with production of 1,400 barrels of oil equivalent per day (boe/d).
The private, independent company followed a predictable but lucrative recipe that has of late become infrequent as acquisitions and divestitures have migrated to the corporate world.
The basic notion is to “get paid for undeveloped locations without actually drilling” by leasing land and proving up one or more wells.
The company bought one tract in Reagan County, Texas, for what was an unthinkable $6,500 in 2012, Mike Oestmann, Tall City CEO and co-founder, said at an August gathering of E&P asset buyers and sellers called ADAM-Houston.
Acreage prices can now reach more than $30,000 an acre.
The Tall City deal is part of a series of acquisitions worth $720 million that AEPB has made in the Wolfcamp Shale in the central Midland Basin since July 31.
AEPB said it has completed or entered agreements with multiple undisclosed parties to acquire 28,000 net acres of leasehold primarily in Reagan County. The acreage has about 49 MMboe of proved reserves.
The acquisitions add roughly 115,000 net acres on a net effective acre basis, the company said.
An effective acre may take into account the potential productive horizons that a company counts below the surface. The prospective number represents an estimate that can greatly exceed actual surface acreage.
AEPB has already spent $2.5 billion to buy Midland acreage. In July, it acquired 63,000 net acres in Reagan, Irion and Crockett Counties from Enduring Resources LLC.
With all deals done, AEPB will own about 91,000 net acres in the Wolfcamp, which the company equates to nearly 248,000 net effective acres. The company said it expects to have proved reserves of about 158 MMboe and 2,700 gross wells to be drilled following closing.
AEPB also announced in October that it planned to file for an IPO within the next year. The eventual IPO will depend on market conditions, according to the company.
AEPB said it will fund the acquisitions with proceeds from the sale of $515 million exchangeable junior subordinated notes issued by American Energy Permian Holdings LLC (AEPH) and cash on hand.
Aubrey McClendon's American Energy Partners LP (AEP) has raised some $14 billion in institutional capital with The Energy & Minerals Group as its lead investor. Additional equity has been provided by First Reserve Corp., AEP’s management team and others.
Tall City will continue to weight market dynamics, commodity prices and other factors in the timing of sales. It will also consider an IPO. It’s backed by at least $300 million from private equity sponsor Denham Capital Management LP.
In August, the company owned about 84,000 net acres with more than 1,400 identified drilling locations. The company operates 16 wells producing 3,927 net boe/d, 83% oil.
The company’s focus is “to optimize assets for a 2015 exit.”
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