2010-12-15-2010-12-10

Acquired W TX Bone Spring sand and Avalon shale assets covering 40,000 net acres in Loving, Reeves, Ward & Winkler Cos.

Oklahoma City-based SandRidge Energy Inc. (NYSE: SD) has sold oil and gas leasehold rights to the company's entire position prospective to the Bone Spring sand and Avalon shale assets in the West Texas Permian Basin to Energen Resources Corp., the E&P subsidiary of Birmingham, Ala.-based Energen Corp. (NYSE: EGN), for $110 million. SandRidge values the deal at approximately $2,750 per acre.

This acquisition brings Energen's total acreage position in the Bone Spring play to more than 33,000 net undeveloped acres and approximately 100 net drilling locations.

The package includes a 100% working interest (78% average net revenue interest) on more than 40,000 net acres (14,500 held by production) in Loving, Reeves, Ward and Winkler counties. Based on 320-acre spacing, Energen has identified 62 net potential drilling locations in the Bone Spring play on 21,300 net acres in Loving, Reeves, Ward, and Winkler counties.

Unproved Bone Spring reserves (net unrisked) are estimated to exceed 21 million barrels of oil equivalents (BOE); oil comprises 78% and gas the remaining 22%. Energen expects to invest approximately $465 million to develop the Bone Spring potential in this acreage acquisition. Previously, SandRidge reported that the package's upside included potential of more than 430,000 BOE per well with a drilling model conservatively representing 150 locations for a total net potential of 50.3 million BOE.

According to Energen, the typical Bone Spring well has estimated ultimate recovery of 400,000 to 500,000 BOE; Energen estimates that drilling and completion costs will be approximately $7.5 million per well.

Energen has drilled eight Bone Spring wells to-date in Ward and Winkler counties and has participated in another 23 wells on its existing Bone Spring acreage, consisting of 18,300 net acres and 12,300 net undeveloped acres. The company plans to drill another five net wells in 2011. Additionally, the company plans to drill at least one Avalon well in 2011 and, if successful, Energen's new acreage position offers some 125 potential Avalon shale locations on a 320-acre spacing. Together with existing acreage, this acquisition brings the company's total Avalon potential to more than 60,000 net undeveloped acres and more than 180 drilling locations.

"This is an exciting purchase for us," says James McManus, chairman and chief executive of Energen. "Not only does it provide additional acreage that we were seeking in order to expand our Bone Spring activity, it offers upside potential in the Avalon shale and, possibly, in the Wolfcamp trend. The Permian Basin has long been Energen Resources' second largest area of operation, and we have had a solid base of oil reserves for quite some time. This acquisition, our fourth in the Permian Basin in the last 18 months, further solidifies our prominence in this prolific, domestic oil-producing region."

At closing, SandRidge received cash proceeds of $88 million. An additional $22 million was placed in escrow to be released to SandRidge in first-quarter 2011. Proceeds from this transaction will be used to fund a portion of SandRidge's planned capital expenditures in 2011.

RBC Richardson Barr was financial advisor to Energen.

Mitchell Wurschmidt, vice president at KeyBanc Capital Markets Inc., says it does not come as a surprise that SandRidge was able to monetize its Bone Spring acreage, given the amount of industry activity and interest surrounding the play. As one of the first public acreage transactions in the play, "the price tag is not out of the range of expectations we had, albeit at the lower end," Wurschmidt says in a Dec. 10 research report.

KeyBanc expects acreage prices to continue to increase in the play overall, as industry activity increases and more data points become available, according to Wurschmidt. He adds that SandRidge plans to raise $400- to $800 million from asset sales in 2010 and 2011.

Raymond James analyst John Freeman says Energen "has accumulated a plateful of handsome assets this year that tack substantial value on its total NAV," according to a Dec. 13 analyst report. In particular, the Avalon shale is worth $5 per share and the Bone Spring is worth $2.08 per share on strip pricing near $90 oil, and assuming 75% is prospective, Tameron estimates.

SandRidge focuses its exploration and production activities in the West Texas Overthrust, Permian Basin, Midcontinent, Cotton Valley trend in East Texas, Gulf Coast and Gulf of Mexico regions. Energen Resources has more than 3.5 trillion cubic feet equivalent of proved, probable and possible reserves in the San Juan, Permian, and Black Warrior basins.