PetroQuest Energy: $193MM Acquisition Grows Production 27%; Company to Accelerate Its Onshore Liquids-Rich Drilling Programs
PetroQuest Energy, Inc. (NYSE: PQ) is an independent energy company engaged in the exploration, development, acquisition and production of oil and natural gas reserves in East Texas, Arkoma Basin, South Louisiana and the shallow waters of the Gulf of Mexico.
On June 19, 2013, the company announced that it entered into definitive agreements to acquire certain shallow water Gulf of Mexico producing properties for approximately $193 million. The transaction increases PQ’s production 27% to a pro forma Q1 2013 average of 116,872 MMcfe/d. The transaction is scheduled to close on July 3, 2013, and has an effective date of January 1, 3013. Read the news release.
View the acquisition presentation.
Acquisition Highlights Include:
- Average daily net production from the acquired assets in May 2013 is estimated to be approximately 1,100 Bbls and 19,000 Mcf.
- Third-party reserve engineering firm’s report, the estimated proved reserves attributable to the acquired assets as of December 31, 2012, were 2,105 MBbls of oil, 134 MBbls of natural gas liquids and 23.8 Bcf of natural gas.
- The proved plus probable and possible reserves associated with the acquired assets as of July 1, 2013, are internally estimated to be approximately 8,500 MBoe (41% liquids).
- During the quarter ended March 31, 2013, and the year ended December 31, 2012, the acquired assets generated revenues less direct operating expenses totaling $13.0 million and $37.6 million, respectively.
- 100% of the increase in the 2013 and 2014 capex programs can be funded from cash from operations or available capital liquidity.
The company had a conference call this morning to review the acquisition. During the Q&A portion of the call, management highlighted that the acquired proved reserves are 100% proved developed (40% PDP/ 60% PDNP). Additionally, management commented that they expect that in 2014 40% of the total company’s production and 60% to 70% of total revenues will be sourced from their Gulf coast assets. This mix will shift as the company ramps up its onshore liquids-rich drilling programs in 2014.
View the webcast.
Funding the Acquisition
In conjunction with the acquisition, the company secured a $185 million bridge loan. The Company is currently evaluating its permanent financing options dependent upon general market conditions. In conjunction with the transactions, the borrowing base on the company’s senior secured bank credit facility will be increased to $200 million from $150 million and the commitment levels will be increased to $150 million from $100 million, subject to certain conditions.
Based on the purchase price of $193 million PetroQuest purchased the assets for $31.08 per BOE of proved reserves, or $46,056 per of flowing BOEPD. This compares to an average enterprise value to proved reserves and enterprise value to flowing production for the 84-company universe in EnerCom’s E&P database of $22.68 per BOE and $107,952 per flowing BOEPD, respectively. As of December 31, 2012, the company reported that the acquired assets had a pre-tax PV-10 value of $195 million ($127 million after-tax), using average prices of $106.88 per barrel of oil and $2.72 per Mcf of natural gas.
This acquisition adds more liquids to PetroQuest’s portfolio. Based on the proved reserves, the acquired assets are 36% liquids compared to 15% for PQ’s year-end 2012 proved reserves. With this increased exposure to oil and a premium gulf coast pricing environment, the 27% increase in production grows cash flow (adjusted Q1’13 EBITDA) 38% on a pro forma basis.
The positive cash flow expansion from the added exposure to oil production is a catalyst for the company to increase its 2013 and 2014 capital expenditure budgets to drill the liquids-rich Woodford and Cotton Valley portions of its portfolio. Associated with the acquisition, PetroQuest increased its 2013 capex budget to $95 million to $110 million from $80 million to $100 million, and instituted a 2014 capital budget of $130 million to $150 million.
Utilizing the expected free cash flow from the acquired assets, PetroQuest announced that it plans to drill more than 50 liquids-rich Woodford wells under the Joint Venture (JV) arrangement (with NextEra) in 2014 compared to 16 liquids-rich wells estimated for 2013. Additionally, the company is now planning on drilling 10 to 15 horizontal Cotton Valley wells in 2014 compared to 1 well for 2013. This expansion of drilling activity targeting liquids-rich assets is estimated to result in production that is 30% liquids weighted in 2014.
Talking with Charles Goodson, chairman, president and CEO of PetroQuest, he described the Gulf of Mexico as an operating region that is the foundation of the company. “It’s where we started back in the 1980s,” Goodson said. “We can take the cash flows generated from our Gulf coast and Gulf of Mexico operations and reinvest in our onshore, resource plays in Oklahoma and East Texas. We typically reinvest about 25% of our Gulf cash flows back in the region.
“This is the largest transaction in the company’s history. These are great assets. The platforms are new, the oldest having been installed in 2008. We would have spent three to four years just getting the acreage assembled and generating production. The blocks fit very nicely with our existing offshore Gulf fields. In the Gulf, you are either very good at acquiring or finding reserves. We believe we’re good finders, evidenced by our La Cantera discovery.” This point is supported by Goodson’s March 21, 2012, quote announcing initial production from La Cantera: “We are excited to initiate production from our La Cantera discovery in line with our stated expectations on both timing and rate. This marks the continuation of a growing list of discoveries the Company has made in South Louisiana and the shallow waters of the Gulf of Mexico. This production also represents the culmination of a long lead time project for PetroQuest that highlights our tremendous operational capabilities and the value of our Gulf Coast assets.”
Accelerating the Woodford to Drive Asset Valuation Expansion
An important component to PetroQuest’s operations is the Woodford JV that was established in 2010. The terms of the JV were structured as a cash and carry to earn 50% of the Woodford acreage. The agreement works out to a structure where the partner pays 75% of well costs for a 50% ownership. As of March 31, 2013, $60.4 million of the drilling carry remained under that agreement. This significantly impacts the economics of PetroQuest’s operations in the Woodford. Even in the company’s low-case scenario and a $3.00 per MMBtu gas price environment, PQ can generate IRRs of 49%, very competitive with any onshore resource basin in the U.S.
As of June 14, 2013, an 18-company onshore peer group traded at an average enterprise value to proved reserves of $19.10 per BOE. If we apply this multiple to PQ’s pro forma proved reserves of 50.4 MMBOE and adjust debt as of March 31, 2013, for the $193 million acquisition cost, we calculate a PQ shares could be valued at $6.34 per share.
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