Midstates Petroleum Co. Inc. (NYSE: MPO) publicly courted SandRidge Energy Inc.’s (NYSE: SD) board and investors Feb. 6 with a proposed all-stock merger that would create a large-scale E&P in Oklahoma’s Mississippian Lime play.

The proposal comes roughly a month after activist investors killed SandRidge’s deal to buy Bonanza Creek Energy Inc. (NYSE: BCEI) in December. Midstates said it is working to make its merger with SandRdige happen quickly, with an ambitious timeline that includes closing by the end of second-quarter 2018.

David J. Sambrooks, Midstates president and CEO, said the company is “ready to move forward immediately to negotiate a merger agreement to form a stronger, more formidable company.”

Midstates Petroleum and SandRidge Energy Acreage Overlap

In a Feb. 6 letter made public by Midstates, the company makes a case for a deal—no debt, strong equity and free cash flow—to John V. Genova, chairman of SandRidge’s board.

The heart of the deal is a unification of 456,000 net acres in the Mississippian Lime owned by SandRidge and Midstates.

Midstates proposal estimates that the combined company would generate 2018 EBITDA of about $391 million and produce an average 53,600 barrels of oil equivalent per day (boe/d). Merging the companies would increase liquidity and scale with a combined current market capitalization of nearly $1 billion, the letter says.

Alan J. Carr, Midstates board chairman, envisions a combined E&P in which SandRidge and Midstates’ shareholders would benefit in $70 million in synergies due to “highly complementary assets.” Combined, the companies would generate $400 million to $800 million in cumulative free cash flow through 2022, the letter said.

The companies would also own a complimentary 75,000-net-acre position in emerging northwestern Stack play with “significant upside potential,” Midstates said. The merger does not include the company’s Anadarko Basin assets, which averaged production of 3,752 boe/d in third-quarter 2017.

The all-stock merger would put SandRidge shareholders in the driver’s seat, but Midstates would take the reins of the company. The transaction trades 1.068 of Midstates shares for every SandRidge share, with SandRidge owning 60% of the new company and Midstates shareholders owning 40%. However, Midstates would manage the company with Sambrooks leading the combined entity.

Midstates’ View: A Combination With SandRidge

The merger is backed by institutional shareholders that own 40% of Midstates. Among those investors is Fir Tree Partners, also an investor in SandRidge, which moved to block the Bonanza Creek merger last year.

Seaport Global Securities said in a brief note Feb. 6 that the deal “implies no premium for SandRidge shareholders” but would create a Mississippian Lime behemoth. However, that asset was the one “SandRidge management desperately wanted to de-emphasize in its portfolio and was a driver … of its failed attempt at acquiring Bonanza.”

Tim Rezvan, an analyst at Mizuho Energy, said the Midstates pitch includes a company without debt and a flat production profile. Overlapping the large holders in both entities “suggests this is an effort to put SandRidge's assets into Midstates' hands, with SandRidge’s “management and board would be unlikely to survive the merger,” he said.

After its unsuccessful effort to acquire Bonanza Creek, SandRidge management likely has a tough road ahead in any case. Activist investors disliked the Bonanza deal’s expected free cash flow deficits and increased leverage.

Midstates appeal is written to highlight “free cash flow generation, which may resonate with SandRidge’s shareholder base,” Rezvan said.

Despite the large size of its Mississippian Lime play, Rezvan questioned whether investors would be excited by such a company and added that “the quality of the Oklahoma assets remains a concern.”

Darren Barbee can be reached at dbarbee@hartenergy.com.