Cabot Deals Marmaton To Chaparral Energy For $160 Million

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Purchased Marmaton assets adding about 2,000 BOE/d of production and 66,000 net acres.

Cabot Oil & Gas (NYSE: COG) has sliced away another piece of its non-core assets, selling its Texas and Oklahoma Panhandle Marmaton assets to Chaparral Energy Inc. for $160.1 million.

For Houston’s Cabot, the deal is another step toward focusing on higher-return projects through the drill-bit and in share repurchases. With the latest deal, it has sold at least $485 million in assets, including the Dec. 9 sale of its legacy conventional Midcontinent assets for $123 million. It last sold Marmaton assets in October.

The transaction, announced Dec. 19, adds about 2,000 barrels of oil equivalent per day (BOE/d), based on Cabot's September 2013 production and 66,000 net acres to Chaparral, based in Oklahoma City, Okla. The acquisition essentially doubles Chaparral's holdings to 126,000 net acres in the Panhandle Marmaton, and the company said it reflects an increased focus on high-quality oil plays with excellent well economics.

Cabot said that in addition to the sale, it recently exercised the $500 million accordion feature on its credit facility, increasing the total commitments to $1.4 billion.

"While our 2014 program is expected to generate free cash flow under current commodity price assumptions, these new commitments provide additional liquidity and increase our overall financial flexibility," said Dan O. Dinges, chairman, president and CEO.”

Analysts are generally bullish on the Cabot as it trims away what it considers unneeded assets. Cabot’s core holdings are in the Marcellus and Eagle Ford.

The company is also positioning itself for the future. A Global Hunter Securities flash note Dec. 19 said that Cabot management announced that the company entered into a 20-year agreement to provide natural gas to the Cove Point LNG facility. Operated by Dominion with offtake contracted for by Sumitomo, Cove Point should be commissioned in 2017. No pricing details were provided in COG's news release.

“While the natural gas supply deal will not impact COG or the Marcellus natural gas situation immediately, it does provide a greenfield outlet that likely will not be nearly as weather dependent as legacy Marcellus natural gas markets,” GHS said.

COG raised its 2013 annual production guidance to 50-55% from 44-54% after adding 280 million cubic feet per day (MMcf/d) of additional firm transport capacity in fourth quarter 2013. COG also announced additional hedging.

“COG remains our top pick as it has one of the best domestic resource plays with its superior economics in the dry gas Marcellus shale more than 100% at the current strip,” said Gabriele Sorbara, an analyst with Topeka Capital Markets.

Sorbara noted the company’s prospects for annual growth of more than 35% annual for “the visible future.”

Chaparral gains assets in Beaver and Texas counties, Oklahoma, and Ochiltree County, Texas. Production is about 81% oil with total reserves estimated to be approximately 32 MMBOE and proved reserves estimated to be roughly 5.5 MMBOE, based on development of the acreage with two wells per section.

"I see long-term, sustainable growth for the company by focusing on the key plays in the Mid-Continent area,” said Mark Fischer, Chaparral's chairman, CEO and president. “As a result of this acquisition, Chaparral holds the largest acreage position in this active play."

Chaparral promotes what it calls the next generation of oil production through carbon dioxide enhance oil recovery.

“By injecting CO2 and water into wells located in fields that most producers consider commercially non-viable, we typically yield an additional 10-15% of the oil-in-place,” the company says.

The Cabot acquisition increases Chaparral's growth potential through the addition of approximately 450 drilling locations targeting the Marmaton Lime formation that typically generate rates of return in the 40-70% range. The area also offers significant upside associated with drilling numerous horizons in a stacked-pay environment, Chaparral said.

This purchase supplements Chaparral's existing footprint in Oklahoma and solidifies its entry into a new phase of growth, concentrating on oil and gas exploration and production in the Mid-Continent.