Equal Energy Ltd. (TSX, NYSE: EQU) signed an agreement with Atlas Resource Partners, L.P. (NYSE: ARP) to sell 50% of its interest in approximately 14,500 net undeveloped acres prospective for Mississippian light oil for total cash consideration of approximately US$18 million, or approximately $2,482 per acre. OAG360 has seen per-acre amounts paid ranging between $1,331 to $4,425 for Mississippian-aged prospective acreage.
To assist in accelerating development of this particular Mississippian light oil play, the two companies entered into a drilling partnership to drill an initial 12-well program expected to commence in Q3’12. EQU and ARP plan to run one rig to drill approximately six to 10 wells by year-end 2012. Based on three wells per section, EQU and ARP believe 90 wells could be drilled to develop the acreage position. Atlas will conduct drilling and completion activities with Equal operating production once the wells are completed. OAG360 has previously noted that a Mississippian well could have an EUR ranging between 150 MBOE and 500 MBOE.
When investors think about the Mississippian light oil play, a SandRidge Energy (NYSE: SD) or Chesapeake Energy (NYSE: CHK) comes to mind. These operators own millions of acres in the Mississippian light oil play and have the capital to drill through their inventories. OAG360 notes however, the Mississippian could have large positive implications for smaller companies, like Equal Energy, if the capital and resources are economically available to drill its inventory. Today’s announcement provides clarity for Equal investors in terms of the company’s approach to addressing the capital needs for Mississippian development.
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We view the initial divestiture of 50% of its interest in 14,500 net acres and the drilling partnership as a positive for EQU. We believe that EQU will do what is necessary to economically develop the Mississippian light oil play. The Mississippian is right in the company’s backyard – EQU’s Hunton play assets in Oklahoma where Equal has been active for a number of years has been explored since the early 1990s. Some of the same water management hurdles have been addressed on EQU’s Hunton acreage making the Mississippian a smoother operating transition compared to a company brand new to the area. Further, EQU is partnered with a quality company. The same management team that runs Atlas Resources was in charge of Atlas Energy when Chevron (NYSE: CVX) paid $4.3 billion in cash and the assumption of debt for the Appalachian operator.
Transition from Trust Model to C-Corp:
The past two years have been a period of transition for Equal Energy. Effective June 1, 2010, the company completed its conversion to a corporation from a Canadian trust. As a part of this transition, Equal’s strategy shifts to growing production and reserves through the drill bit, which was more in line with their pre-conversion model in that the company had not paid a dividend as a trust for several years. Further, Equal resolved its farmout challenges in Oklahoma by purchasing the interests of its former farmout partner, the result of which was higher net production and increase working interests in the Company’s Hunton operations in central Oklahoma. With the continuing priority on reducing its debt to cash flow ratio, a cleaner balance sheet, streamlined operations, and the capital to accelerate development of its Mississippian prospectivity, OAG360 notes Equal is in a much stronger corporate position that it was on June 1, 2010. The management team has made a concerted effort to reduce debt, drill within cash flow, and grow production and reserves in a manageable way for a company of Equal’s size, and they have delivered on what they set out to do.
Equal Energy is an established operator in the region:
During EnerCom’s The Oil and Services Conference™ 10 in San Francisco, Equal CEO Don Klapko challenged investors to describe how many successful wells are needed to prove up a play. Answers ranged from a handful, to 10 or more wells. EQU has approximately 94 horizontal and 69 vertical wells producing in the Hunton, and is currently the only publicly traded company operating in the play. The company said in the news release that many of the wells will make use of Equal’s existing Hunton water handling infrastructure in Grant, Garfield and Alfalfa counties thus minimizing infrastructure costs and improving project economics. OAG360 notes that 88% of EQU’s 15,200 net acres prospective for the Mississippian is held-by-production through its Hunton vertical exploration and development drilling over the past few years.
Equal plans to use proceeds from the sale to reduce debt and utilize its credit facility to fund participation in the drilling program. During 2011, EQU retired and/or refinanced its $119.9 million in convertible debentures bearing interest rates ranging from 8.00% to 8.25% by selling non-core assets, using its revolver which is priced on a floating interest rate (it was 3.00% at year-end 2011) and issuing $41.3 million in new convertible debentures at a 6.75% interest rate. OAG360 notes that although the company reduced its debentures, it increased borrowing on its $200 million credit facility to $138.8 million from $24.9 million during 2011. The revolver will be reviewed next in June 2012, and has a maturity date of June 24, 2013.