RSP Permian Inc. (RSPP) has cobbled together about 5,700 Midland Basin acres in multiple bolt-on acquisitions that could add 162 horizontal locations for $274 million.

The company suspects it may discover more locations by unlocking potential upside in prospective drilling zones.

To date, RSP has closed about $65 million worth of the acquisitions using cash and $50 million in borrowings. The company said a portion of the acquisitions include additional working interest in its key operating areas.

"We are excited to announce several contiguous, bolt-on acquisitions that are located in the core of our current operating areas,” said Steve Gray, CEO. “They add highly prospective horizontal acreage that fits perfectly with our existing assets, operations, infrastructure and current horizontal drilling plans.”

The deals are being privately negotiated between RSP and sellers. RSP said the remaining deals include an offer to purchase other working interest partners in the properties, which could increase the aggregate purchase price of the acquisitions by about 10-15%, or up to $40 million.

Existing production on the acquired acreage is 1,600 barrels of oil equivalent per day (boe/d), and RSP said it offers more than 85 MMboe of horizontal reserve potential in five target zones. The acreage is 100% operated and 100% HBP, with average royalties of 23%.

As of the second quarter, RSP has 26 operated horizontal completions with average production of 17,923 boe/d. About 76% of the production is oil. Remaining 2015 oil production is about 35% hedged. In its second-quarter 2015 earnings report, RSP said it is raising production guidance by 10% and oil volumes by 14% through type curve outperformance. Additional completions and the acquisitions would have “minimal impact,” the company said.

RSP ended the quarter comfortably, with 544 million in liquidity, including $44 million in cash. The company reported EBITDA of $73 million and production of 19.9 Mboe/d, far ahead of consensus of $64 million EBITDA and 18.3 Mboe/d. The company’s higher production was complemented with lower lease operating expense (LOE) costs and a 22% decrease in general and admnistrative expense (G&A) costs, said Patrick Rigamer, senior analyst, Global Hunter Securities.

The bolt-on deals add acreage that RSP is already directly on or that is adjacent.

Brian Gamble, analyst, Simmons & Co. International, said he expects the deals to cause some market discomfort in the short term but long term will likely benefit RSP.

“Building a large continuous acreage position benefits operations with more long laterals, more infrastructure overlap,” he said. “The fact that the acreage is 100% HBP means there are no immediate needs for additional drilling capital. These are properties which are very familiar to RSPP as the acreage sits in areas where the company has seen excellent well results.”

RSP noted that it can share existing infrastructure and planned projects to service a large portions of the acreage and that the company has de-risked the geology where it has drilled wells.

RSP is in preliminary discussions with its lenders to receive a 20% increase in its borrowing base in the same time frame as the transactions close, though an increase is not dependent on closings.

RSP’s last major acquisition was in July 2014, when it purchased 6,652 net acres within the core of the Midland Basin in Glasscock County, increasing its horizontal inventory by 20%.

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