Carrizo, Emerald Oil Grab Acreage In Delaware Basin Deals

The Delaware Basin has switched its spotlight back on as two recent deals have attracted money and talent to the play.

On May 12, Carrizo Oil & Gas Inc. (CRZO) said it has entered a farm-out agreement in the basin and plans to begin an operated drilling program later this year. The participant was not disclosed.

Emerald Oil Inc. (EOX) said May 11 that it has also entered into an agreement with undisclosed sellers to acquire core Delaware Basin acreage in Lea and Eddy counties, N.M., for $75.2 million cash. The acquisition is expected to close at the end of May.

Jonathan D. Wolff, analyst, Jefferies, said Houston’s Carrizo continues to grow its assets and generate value without straining the balance sheet.

To fund the Delaware Basin activity, Carrizo has allocated $30 million to its 2015 drilling and completion capital expenditure plan, increasing it towards $470- to $490 million. The company's 2015 land and seismic capex plan remains unchanged at $35 million.

Wolff said the deal was largely anticipated and should be well received by the market. The company’s expansion in the Delaware and an announcement to run a rig there starting in the third quarter of 2015 is accretive to asset value.

Carrizo plans to drill three horizontal wells during 2015 but, due to the timing of completion and hook-up for the wells, it doesn’t currently expect material production from the play in 2015.

Carrizo said it will be the operator of the wells and expects to have an average working interest of at least 80% in them. As part of the acreage acquisition cost, Carrizo will carry its partner on the wells.

Carrizo’s agreement with a larger operator gives it the right to earn about 2,800 net acres in eastern Culberson County, Texas. The deal brings the company's acreage position in the play to more than 20,000 net acres and offsets Carrizo's existing position in eastern Culberson County. That gives the company the ability to build a contiguous nine-section unit where it has the potential to drill about 30 long-lateral wells on 1,000-foot spacing in the Upper Wolfcamp zone.

Wolff said that Carrizo’s deal “superficially” amounts to 2,800 net acres but has the potential to add meaningful value in a number of ways.

He estimates the company could efficiently drill up to 48 Wolfcamp A wells at 7,500-foot laterals and 660-foot interlateral spacing on a contiguous position.

“It enables Carrizo to block-up its existing Culberson County Delaware Basin position, which allows for the development of a contiguous nine-section unit,” he said.

In addition, the acreage could be prospective for the Wolfcamp B, which would represent upside to inventory.

“We also note that, while the wells are gassier, other operators have had some success drilling higher-rate Wolfcamp D wells in the area,” he said.

It’s also likely Carrizo can continue to do more farm-outs with the same partner going forward—building its northern Delaware Basin position well beyond its current acreage.

S.P. "Chip" Johnson IV, Carrizo's president and CEO, said the company has watched the Delaware Basin for a few years and will drill its first operated well later this year.

“This farm-out deal fits perfectly with some of our existing acreage and we're optimistic about the potential as it is located near strong industry results,” Johnson said. “We continue to work on other acreage deals in the area and hope to materially grow our position in the basin over time."

Emerald’s Delaware

In New Mexico, Emerald picked up 10,746 net acres with 80% working interest, 100% operated in Lea and Eddy counties. Emerald said it will have access to multi-stacked, oil-weighted pay zones prospective for the Avalon Shale, first, second and third Bone Spring sand and Wolfcamp Shale.

Emerald, based in Denver, plans to drill five net Delaware wells for the remainder of 2015 at up to $38 million.

The company paid about $7,000 per acre.

Emerald is currently evaluating multiple financing options including public and private debt and equity to fund the acquisition and associated increases in capital expenditures. The company is also developing the Bakken and Three Forks shale oil formations and Pronghorn sand oil formation in the Williston Basin.

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