ROSE acquires assets from CRK

[dan_s]

Good deal for both companies. This shores up CRK's balances sheet. With higher NG prices, CRK is looking better.
For ROSE, it gives them a new core area and layers on more growth potential.

HOUSTON, March 15, 2013 (GLOBE NEWSWIRE) -- Rosetta Resources Inc. (ROSE) ("Rosetta" or the "Company") today announced it has entered into a definitive agreement to acquire Permian Basin assets from Comstock Resources, Inc. (CRK) ("Comstock") for a purchase price of approximately $768 million, subject to customary closing adjustments.
Provides new basin entry in Permian and access to oil-weighted multi-pay areas
• Adds 40,200 net acres in Delaware Basin delineated Wolfbone play
• Expands capital project inventory by approximately 1,300 gross drilling locations
• Adds 13,100 net acres with multiple exploratory opportunities in Midland Basin
• Accretive to cash flow per share in 2014

[dan_s]

I really like this deal for CRK. It allows them to focus on the Eagle Ford where they have the best chance to increase oil production quickly. The market should like this deal for both companies ("Win-Win").

[ghrcap]

I've been out of ROSE for awhile but was able to get back in today on the dip.

Downgrading ROSE to Accumulate from Buy ($47.75 – A) Brian Lively
blively@tudorpickering.com, Brad Pattarozzi bpattarozzi@tudorpickering.com

· Stock thoughts – Permian acquisition puts to bed inventory concerns that would
have likely intensified as ROSE approached FCF generation in 2013. Instead, the debate
shifts to acreage quality and the impact of a Permian development program to corporate
level returns. To be sure, Eagle Ford success was going to be a hard act to follow given
the consistency and exceptional returns (100+% IRRs) from this asset. While the new
acreage almost doubles the number of potential locations, the sacrifice is returns (20%
IRRs). Deal is accretive to CFPS, increases 3P NAV $1 to $68/share and dilutive on
2014/2015 EV/EBITDA multiples. Moreover, funding needs to be addressed with both
debt and equity financing on the table (we’ve assumed $700mm in debt in our model).
Upside comes from the horizontal Wolfcamp where success could add $15+/share to 3P
NAV. We’re still believers in the ROSE model and see valuation as attractive here, but
more details on funding plans and horizontal potential needed to warrant Buy rating.

· Acquisition summary – ROSE paid $768mm to acquire CRK’s Permian position,
which includes 53k net acres in two TX counties (40k in Reeves and 13k in Gaines
county) plus 3,300boepd current production (TPHe 2013 production estimate increases to
+39% y/y, 2014 to +41% y/y). For background, CRK bought these assets for $332mm
(1,445boepd) in December 2011 from Eagle Oil and Gas. We currently value this asset
at $825mm and includes: $275mm for PDP value ($80k/boepd), $500mm for undrilled
40-acre Wolfbone development ($12.5k/acre) and ~$50mm acreage. On our math, ROSE
paid ~5x 2014 cash flows for this asset. We view this acquisition as low risk and low
return for vertical development with further upside from horizontals ($15+/share).
Permian also helps diversify the portfolio while lowering condensate exposure.

· Financial metrics – Deal is accretive on earnings/cash flows but dilutive on debtadjusted
metrics. Our 2013/2014 cash flows increase by 7% and 10% respectively on
higher and oilier production. However, acquisition costs combined with lower well
economics reduced ROCE by ~5%/year through 2015. In addition, FCF generation is
deferred from late 2013 to 2015. EV/EBITDA multiples increase by ~15% to 5.7x/4.4x
2013/2014. Debt-adjusted cash flow growth is reduced from +25% to -1% in 2013
(acquisition costs) and from 36% to 32% in 2014 (well economics). Key for stock is
improving capital efficiency which likely comes with successful horizontal results.

· Well economics – Success in the Eagle Ford is both a blessing and a curse.
Blessings come in the form of accelerating corporate returns and economic cash
flow/production growth (i.e. real value creation). The curse is finding a new position that
is competitive to the stub portfolio. For the Eagle Ford (Gates Ranch), we’re modeling
1.6mmboe EURs for $7mm well costs which yield a 100+% IRR. For the vertical
Wolfcamp, our type curve is based on the average performance from CRK’s vertical
completions (205mmboe EUR, $4mm well costs) which generate <20% IRRs. For the
horizontal Wolfcamp (potential), we’ve calibrated our single well model to the Monroe
35 completion which has a 500mboe EUR. Depending on well costs, IRRs range from
20% to 50%. We assume $87/bbl, $4/mcf, and NGL at 43% of nymex long-term
assumptions.

· Valuation – NAV increases $3/share to $68 which includes +$1/share for Permian
acquisition and +$2/share for YE’12 roll forward/reserve calibration. 3P NAV
breakdown: $19/share 1P net of debt, $39/share Eagle Ford upside and $10/share for
Permian. Horizontal potential not included but could increase our valuation by
$15+/share (20+%), if successful. While still early, industry activity is moving to
horizontals and it seems likely with success that ROSE would do the same. As noted
above ROR’s for horizontal wells are 2x those of vertical wells.
Tudor, Pickering, Holt & Co.

[dan_s]

I just finished updating my ROSE forecast model for the acquisition from CRK. My Fair Value Estimate goes up to $72.25.

It will take a couple quarters of actuals before we really know what this means for ROSE, but since it is accretive to CFPS the Fair Value Estimate goes up. As TPH notes, the real upside is in the results of the horizontal drilling in the Permian Basin.

I'm now going to take a look at CRK, which should look a lot better. This deal really improves the look of their balance sheet. Note that since CRK uses the Successful Efforts method, they will book a big gain on this sale in Q2.