PDCE

[dan_s]

PDC Energy Inc. joined the parade of companies buying into the U.S.’s biggest oilfield, announcing a $1.5 billion purchase of two companies with holdings in Texas’ Permian Basin.

PDC agreed to buy two closely held companies with a combined 57,000 acres in the Permian, the Denver-based explorer said in a statement Tuesday. The driller will pay $915 million in cash and give about 9.4 million of its shares to Kimmeridge Energy Management Co., a New York-based private equity fund that manages the two Permian companies.

Drillers including Pioneer Natural Resources Co., Parsley Energy Inc. and Concho Resources Inc. have all announced deals in the Permian this year, expanding their presence in one of the few North American oil regions where production is profitable at current prices. Until now, PDC has concentrated on wells in Colorado and Ohio, according to its statement.

The privately negotiated transaction includes about 57,000 acres in Reeves and Culberson counties in Texas, which currently produce the equivalent of about 7,000 barrels of oil a day. The company intends to fund the cash portion of the purchase though “potential equity and debt financings," PDC said. The deal is expected to close in the fourth quarter.

[dan_s]

Stifel: "Quality Delaware Basin properties diversify the asset base and could alleviate investor concern over the depth of PDCE's drilling inventory."

Stifel rates PDCE a BUY with a $70 price target. My valuation is $92.00.

Delaware Basin Acquisition
After today's close, PDCE announced the acquisition of 57M net acres in the
Delaware Basin (41M Reeves, 16M Culberson County, TX) with production of 7
MBoe/d from 21 wells for $1.5B. The sellers are 2 private companies managed by
Kimmeridge Management Company. Assuming $35M/Boe/d suggests an
undeveloped acreage price of $22M/acre compared to recent acquisitions of
$27M/acre by FANG for 19M net acres on 7/13/16, $15M/acre by CXO for 12M net
acres on 1/18/16, and $13M/acre by EOG for 26M net acres on 11/5/15.

A Good Neighborhood
The bulk of the Reeves County acreage is located near NBL and CXO (North
Harpoon) properties where the Wolfcamp A is generating strong returns (Figure
1). NBL recently completed 3 short-lateral wells that are tracking 33%-99% above
our 680 MBoe type curve. NBL also plans to test the Lower Wolfcamp A
and 3rd Bone Spring early next year. CXO and OXY have completed strong wells
in the Lower Wolfcamp A in the area.
PDCE management believes the properties hold more than 700 gross (~650 net)
drilling locations in the Wolfcamp A, B, and C with net resource potential of 530
MMBoe based on 4-12 wells/section. We plan to update our NAV estimate when
the company releases further details on the acquisition.

Financing
PDCE plans to finance the transaction with $950MM of cash and 9.4MM shares
placed with the sellers valued at $590MM. Management expects to fund the cash
portion with a combination of equity and debt and maintain debt/TTM EBITDA
<2.5x. We assume the company will issue at total of ~12MM shares and add
$730MM in debt.

Positive Acquisition
Like most Permian Basin transactions, this acquisition was not cheap but should
be well received by investors. The company's high quality Wattenberg inventory
lacked the depth of some competitors, including many with significant Permian
Basin positions. The new properties diversify the asset base and could potentially
lengthen the drilling runway as multiple pay zones are successfully developed.

[dan_s]

Development Plan
PDCE expects to spend $55-$65MM on the properties in 2H16 to drill 9 wells
(including 7 with 1.5-2.0 mile laterals), complete at least 2 more wells, and expand
midstream infrastructure. The latter includes gas gathering, ROW, and 5 SWD
wells. The company plans to run 2 rigs in the area by YE16. The transaction is
expected to close in 4Q16.