Tying its fate more and more to the Tuscaloosa Marine Shale (TMS), Goodrich Petroleum Corp. (GDP) said July 27 it has agreed to sell about 40% of its Eagle Ford acreage in La Salle and Frio counties, Texas.
Houston’s Goodrich will sell about 13,000 net acres in the oil window of the Eagle Ford Shale to an undisclosed buyer for $118 million.
Some analysts viewed the deal negatively, saying it strips away a significant portion of Goodrich’s Eagle Ford production. The divested properties constitute about 44% of the company's first-quarter 2015 oil production. Analysts also said the sales price suggests little or no value was given to non-producing acreage.
The acreage averaged 2,850 barrels of oil equivalent per day (boe/d), 75% oil. Company capex in 2015 is almost entirely devoted to the TMS with little going to other plays.
The partial sale of Goodrich’s proved reserves—10.4 MMboe and associated leasehold—suggests the company accepted $11.35/boe less than current trading levels of $19.80/boe, said Gordon Douthat, analyst, Wells Fargo Securities.
Overall the Eagle Ford represents 30% of Goodrich’s total production. The company will retain 17,000 net acres in the play.
“The transaction is dilutive from a valuation standpoint, unclear from a liquidity standpoint and leaves the company more of a Tuscaloosa Marine Shale pure play—a higher risk value proposition in the face of uncertain commodity tape,” Douthat said. “We think the stock remains under pressure.”
Goodrich said it plans to book a gain of up to $60 million on the sale at closing, after factoring in closing adjustments. The company will pay off its bank revolver and retain the difference in cash from sales proceeds.
Goodrich’s revolver base was $150 million with $52 million outstanding as of March 31, Douthat said.
The deal is worth about $41,500 per flowing barrel, below Raymond James Equity Research’s typical assumption of $50,000 per flowing barrel.
Mike Kelly, analyst, Global Hunter Securities, said the deal buys the company liquidity and time but points to an asset value that is below current expectations.
With no credit given to the undeveloped acreage, the deal “brings into question the future status of GDP’s $150 million borrowing base,” Kelly said.
At strip pricing and without the Eagle Ford, Goodrich is likely to struggle to generate positive cash flow in fiscal year 2016 without major cuts to lease operating expenses and general and administrative costs.
“We are now modeling one TMS rig running in the second half of 2016, which results in 2016 estimated production falling 26% year-over-year, averaging 5,364 boe/d,” Kelly said. “We are maintaining our ‘Sell’ rating and lowering our $0.50 price target to $0.25 after reducing the undeveloped value of the Eagle Ford in our model.”
Robert Turnham, Goodrich’s president, said the monetization of its proved reserves and associated acreage from drilling efforts improves liquidity while maintaining a position in the Eagle Ford for future development or sale.
“Acreage retention was an important aspect of this transaction for us as it allows for additional future value creation from the asset in what we believe will be an improved oil price environment,” he said. “The ability to pay off our bank debt and book the difference in cash in this difficult commodity cycle is an obvious benefit of the transaction as well.”
Turnham said Goodrich’s capex remains $100 million.
Goodrich entered the Eagle Ford Shale in April 2010 and held 30,000 net acres as of March 31, all of which are either producing from or prospective for the play.
Citigroup Global Markets Inc. advised on the structuring of the transaction. The deal is expected to close in September with an effective date of July 1.
Contact the author, Darren Barbee, at dbarbee@hartenergy.com.
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