FORT WORTH, Texas—Where will the newest oil- and gas-focused special-purpose acquisition companies (SPACs) buy? The Delaware Basin, said Mike Wichterich, president of Delaware-focused Three Rivers Operating Co. III LLC.

“They are going to copy what’s been done before,” he told attendees of Hart Energy’s recently held DUG Permian Basin conference. “They will come to the Delaware and they will be a force to reckon with. And we will see it in super-short order.”

What’s been done before is Mark Papa’s entry into the Delaware Basin last year via the acquisition of Centennial Resource Development Inc. (NASDAQ: CDEV) by Riverstone Investment Group LLC-sponsored Silver Run Acquisition Corp. The SPAC raised $500 million, including the overallotment, in its IPO in February 2016.

Papa, retired chairman and CEO of EOG Resources Inc. (NYSE: EOG), is a Riverstone partner. Centennial closed at $20.19 April 11.

Expected to close in this quarter is KLR Energy Acquisition Corp.’s (NASDAQ: KLRE, KLREU, KLREW) acquisition of Delaware Basin-focused Tema Oil & Gas Co., which will be renamed Rosehill Resources Inc. The KLR Group LLC-sponsored SPAC, led by ex-EPL Oil & Gas Inc. CEO Gary Hanna, IPOed in March 2016, raising $82 million including overallotment. KLREU units closed at $11.75.

Three new E&P-focused SPACs have IPOed in the past few weeks:

  • A second Riverstone-sponsored vehicle—Silver Run Acquisition Corp. II—began trading in March, led by retired Anadarko Petroleum Corp. (NYSE: APC) chairman and CEO Jim Hackett, who is also a Riverstone partner. It raised $1.035 billion, including the overallotment. By SPAC rules, at least 80% of the initial raise must be deployed in the first acquisition. Although each SRUNU unit, which was sold for $10, represents $10 in an escrow account until a combination is completed, units closed at $10.40 April 11.
  • Led by ex-Chesapeake Energy Corp. (NYSE: CHK) and Williams Cos. Inc. (NYSE: WMB) midstream executive Bob Purgason, Kayne Anderson Acquisition Corp. sold $350 million of units a few days after the Silver Run II offering. KAACU units closed at $10.
  • And NGP Energy Capital Management LLC-sponsored Vantage Energy Acquisition Corp. sold $480 million of units April 10, upsized from the previously expected $400 million. Led by ex-Encana Oil & Gas (USA) Inc. president Roger Biemans. VEACU units closed at $10 April 11.

The HAF Math

Papa’s Silver Run I vehicle, which assumed Centennial’s name, paid some $34,000 an acre for the Delaware entry, Wichterich said, and is trading at some $60,000 an acre on Wall Street now.

“That was a huge Wall Street win. That was doubling your money in a year.”

Wichterich’s two previous startups each held upstream properties in the Midland Basin. His current Three Rivers entered the Delaware instead. Both basins are “giants,” he said. “The Wolfcamp Shale in the Delaware and the Wolfcamp Shale in the Midland are both good.”

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But, when Wichterich was looking for leasehold for Three Rivers III, acreage valuation in the Delaware was trailing that of the Midland. “It seems farfetched today based on all we’ve seen [in deal values since].”

Within the Delaware, the Three Rivers team studied well results in six areas. “Every one of these areas has good wells.”

Adding in NGL, the three northern Delaware regions “start to rise above.”

When including natural gas production, “all of a sudden, the northern three really stand out.” He added, “You know, people still pay money for gas. I know it doesn’t seem like it, but they do. And liquids are worth something.”

Wichterich credited RSP Permian Inc. (NYSE: RSPP) with using “effective acres” math in describing Permian Basin leasehold—factoring for multiple landing zones—when IPOing in January 2014. He has come up with a supplemental formula: “cost per hydrocarbon-acre foot” or HAF.

“There are 4,000 hydrocarbon feet in the Delaware,” Wichterich said. On this basis, a $20,000 acre in the Delaware is $5 per vertical foot. Meanwhile, a $20,000 acre in the Midland Basin, with 3,700 ft of hydrocarbon pay, is $5.40. In Oklahoma’s Stack Play (1,000 ft), it’s $20; Eagle Ford (500 ft), $40; and the Bakken (300 ft), “it gets sort of ridiculous” at $67.

“[HAF] is a really great comparison when people talk about the Permian being too expensive,” Wichterich said. Based on his HAF math, his Three Rivers III’s 60,000 net Delaware acres have 240 million hydrocarbon-acre feet. At $5 per, the company’s worth may be $1.2 billion.

Nissa Darbonne can be reached at ndarbonne@hartenergy.com or @nissadarbonne