SandRidge Expands Gulf Presence With Dynamic Offshore Deal
To buy company multiple operated and nonop properties in shallow GOM offshore TX, LA & AL, gaining 25,000 BOE/d, 62.5 MMBOE proved.
SandRidge Energy Inc., Oklahoma City, (NYSE: SD) plans to acquire privately held, Houston-based Dynamic Offshore Resources LLC for $1.275 billion in cash and stock.
The deal consists of approximately $680 million in cash and approximately 74 million SandRidge shares valued at $8.02 per share.
Dynamic Offshore’s assets include multiple operated and nonoperated properties in the shallow Gulf of Mexico offshore Texas, Louisiana and Alabama. The company operates primarily in water depths of less than 300 feet.
Production is 25,000 barrels of oil equivalent per day (50% oil). Proved reserves as of year-end 2011 were 62.5 million barrels equivalent (50% oil). Of these reserves, 80% of the value and the quantity are proved developed.
SandRidge chairman and chief executive Tom L. Ward says, “We are acquiring these assets for less than PV-10 of the proved developed reserves and at just over $50,000 per flowing barrel. Additionally, we expect these operations to contribute significant free cash flow in excess of the anticipated annual drilling and recompletion capital budget of $200 million.”
SandRidge has secured $725 million in committed financing from BofA Merrill Lynch, SunTrust Robinson Humphrey and The Royal Bank of Scotland Plc that the company may use to fund the cash portion of the consideration. In addition, the company's $790-million borrowing base facility remains undrawn.
BofA Merrill Lynch and SunTrust Robinson Humphrey are financial advisors to SandRidge. Covington & Burling LLP is legal advisor to SandRidge. Vinson & Elkins LLP is legal advisor to Dynamic Offshore.
The transaction is expected to close during the second quarter of 2012.
KeyBanc Capital Markets Inc. analyst David Deckelbaum estimates the deal values production at $51,000 per flowing barrel equivalent per day and proved reserves at $21.23 per barrel equivalent. Deckelbaum says this is roughly in line with recent shallow Gulf of Mexico averages of $55,242 per flowing barrel equivalent per day and proved reserves of $21.63 per barrel equivalent.
“We note that the valuation also implies that SD is effectively paying $16.80 per share for Dynamic Offshore, representing a 6.5% discount to the recently proposed offering of $18 per share,” he says. “This acquisition is truly a more contrarian call by SD management in efforts to gain more leverage to crude to help the company achieve its three-year plan to triple EBITDA and lower debt/EBITDA. We suspect that the move offshore will be met with much investor skepticism around renewed acquisitive activity, a migration to a more foreign operating environment, and less immediate focus on reducing leverage.”
KeyBanc, however, agrees with SandRidge management's stance that the deal will be accretive across the board and note that the Dynamic Offshore assets should generate about $200 million in free cash annually, particularly with premium HLS/LLS pricing in effect in the GOM.
Tudor, Pickering, Holt & Co. analyst Dave Pursell says, “SandRidge is as tenacious as a honey badger with their defensive driven acquisition that secures future cash flow and shores up their balance sheet. Honey badgers are tough skinned and SandRidge will need to be as multiple compression from buying into the GOM will be painful, but bridges to 2014 and beyond+.”
Despite this, Tudor Pickering has downgraded SandRidge as 2014 is a long time away for shareholders that just absorbed approximately 15% more stock issued at the company’s 1P value, which is well below Tudor Pickering’s 3P. Concerns include multiple compression, strategy shift, NAV dilution which outweigh the positives.