Rosetta’s $85 Million Permian Bolt-On Is Pricey But Worth It, Analysts Say

To acquire 5,078 net acres within the Delaware Basin including 11 operated wells targeting the Upper Wolfcamp.

Rosetta Resources Inc. (Nasdaq: ROSE) squeezed in a final 2013 acquisition at a high price, gaining 5,078 net acres in the Delaware Basin for $85 million.

The assets, located in Reeves County, include 11 operated wells (13 gross) in the Upper Wolfcamp that bolster its position in the Permian Basin. The company estimates the addition of 49 net (145 gross) future horizontal upper Wolfcamp drilling locations to expand the capital project inventory.

Rosetta entered into a definitive agreement with several private parties to acquire the Delaware assets on Dec. 30. The transaction is expected to close by Feb. 28.

The purchase price works out to $16,700 per acre without adjustments for production, a positive valuation marker for others with acreage in the area, said Gordon Douthat, senior analyst for Wells Fargo Securities.

“While expensive on a headline acreage price,” the acquisition looks like a money maker on a per well basis should type curve and location assumptions hold, he said.

“We calculate a per well NPV of $5.3 million, or $3.5 million after allocating $1.73 million in acreage cost per well. Success in additional formations and downspacing could add upside potential.”

The purchase price is more than the $14,400 per acre ROSE paid for their original acreage position, said Jeff Dietert, managing director, head of research for Simmons & Co. International.

“However, we believe adding acreage strategically to their current position has numerous benefits over the long run (with) efficiencies, lateral consistency,” he said.

Rosetta has built a presence in the Eagle Ford and Permian. Its 2013 reserves are up 39% to 279 million barrels of oil equivalent. Reserves are split 60% liquid and 40% gas, versus 58% liquids and 42% gas in 2012.

“Rosetta Resources has assembled an attractive asset base concentrated in two prolific U.S. plays: the Eagle Ford and Permian,” Douthat said. “We expect shares to outperform based on continued execution in the Eagle Ford and believe that Permian provides meaningful upside potential as horizontal drilling takes hold in the play.”

In the Delaware, ROSE brought on an Upper Wolfcamp well in Reeves county that came on at seven day stabilized rate of 829 barrels of oil equivalent per day (BOE/d) on a 4,000-foot lateral while also providing well economics with EURs of 500-600 MBOE for $8-$9 million.

The company increased total annual daily production to 50 MBOE/d, 34% growth from 2012.