Current BBG Stock Info

Bill Barrett Corporation (ticker: BBG) announced a merger with Fifth Creek Energy yesterday, creating a company with more than $1 billion in initial equity value. Bill Barrett held a conference call today, allowing investors to examine the specifics of the deal, and what the pro forma company will look like.

Fifth Creek’s assets

Fifth Creek owns about 81,000 acres in the DJ basin, close to the boarder of Colorado and Wyoming. This is farther north than much of the well-known activity in the Niobrara, but is in the Hereford Field, a second location with strong well results. According to Bill Barrett, the Hereford field is where the horizontal Niobrara play first kicked off, when the Jake well was drilled in 2009. Anadarko, Noble, Exctraction and EOG all own acreage nearby.

Fifth Creek has a significant amount of reserves, 113 MMBOE, but a very small amount of production, just under 2,898 BOEPD. The company reports it has 1,179 gross undeveloped locations, and is currently completing three wells.

Bill Barrett CEO Scot Woodall will be CEO of the new combined company, Fifth Creek becomes majority shareholder

As previously outlined, the transaction will see Bill Barrett and Fifth Creek each become subsidiaries of a new holding company, “New BBG.” Fifth Creek will receive 100 million shares, while the 76 million Bill Barrett shares will be exchanged on a one for one basis. Bill Barrett CEO and President Scot Woodall will become CEO and President of the combined company. The Board of Directors of New BBG will be comprised of eleven members, including the six members of Bill Barrett’s current Board of Directors and five members that will be designated by Fifth Creek. Jim W. Mogg will continue to serve as Chairman of the Board.

Bill Barrett gets cheap reserves, but most are undeveloped

Since Bill Barrett’s shareholders will receive an equal number of shares of the new company, this transaction can be viewed as an all-stock purchase of Fifth Creek. Based on Bill Barrett’s closing price yesterday of $5.72, this implies a valuation of $572 million for Fifth Creek.

This valuation would imply Bill Barrett is paying $5.06 per BOE of reserves. However, Fifth Creek has a very high proved undeveloped (PUD) percentage, 97%, according to Bill Barrett. If Fifth Creek had the same PUD percentage as Bill Barrett, 34%, it would have 5.1 MMBOE of reserves. If Fifth Creek’s reserves are adjusted to Bill Barrett’s PUD percentage, the purchase price equates to $111.36 per BOE of reserves.

Fifth Creek’s production is low, relative to its acreage and reserves, so metrics for production are naturally high. Bill Barrett is paying an implied $197,241 per flowing BOEPD. The purchase price implies an unadjusted $7,062 per acre, or $5,809 after adjusting for production.

Earlier SandRidge acquisition of Bonanza Creek is comparable in size, price

This is the second major DJ transaction in the past month, as SandRidge purchased Bonanza Creek in mid-November. In that transaction, SandRidge paid $8.19 per BOE of reserves, $47,215 per flowing BOE and an unadjusted $9,600 per acre.

These metrics may be very interesting for Carl Icahn, who is currently opposing the SandRidge transaction. Icahn has repeatedly stated that the purchase of Bonanza Creek is value destructive, and the unadjusted acreage and reserves valuations would seem to support this, as Bill Barrett is getting property in a similar location for a comparable price. Bill Barrett is paying significantly more for production, however, and much of Fifth Creek’s reserves are undeveloped, so conclusions regarding which company got the better deal are not obvious.

Niobrara a cozy home for ~$1 billion – ~$2 billion oil companies

Assuming the Bill Barrett and SandRidge acquisitions are completed, the Northern Colorado Niobrara will become a Petri dish for six similar companies, all of which are all roughly $1 billion companies that are primarily active in the Niobrara:

  • Bill Barrett,
  • SandRidge,
  • Extraction Oil & Gas,
  • Crestone Peak,
  • Great Western, and
  • and SRC Energy.

During the growth of shale in the past 10-15 years, Anadarko and Noble became the two “big dogs” in the Wattenberg. But both companies have geographically diverse assets and are less focused on their DJ properties, instead concentrating on other basins.

Bill Barrett and the others, along with the larger PDC Energy at $3 billion, will likely be the most active companies in the play in coming years. With similar size and locations, each company will have to differentiate itself for investors.

Q&A from BBG conference call

Q: Now that you’ve added about 1,200 gross locations or so, are you going to focus on integrating this asset or you think you might remain acquisitive and continue consolidating the northern DJ Basin both I guess in terms of acreage packages as well as maybe additional corporate M&A?

BBG: Well obviously, we have got decades of inventory here. So, we’re really pleased with where our inventory sits. But I think when you become a pure DJ Basin player, you have to look at all of the opportunities around you. And I think that we will continue to look at all the opportunities around you. I think Fifth Creek has been very successful in adding to their acreage position. They’ve done an outstanding job of continuing to lease around them. We’ve added acreage to our Northeast Wattenberg position and I think that we would continue to do that. It just makes sense as we continue to focus on the DJ Basin and provide great results to our shareholders.

Q: A few months ago, Fifth Creek had talked about exiting 2017 at closer to 10,000 barrels a day in that production, they are at about 3,000 barrels a day in the third quarter. And I guess there’s three wells completing nine – three wells completing now and another nine that are waiting on completion. So that 10,000 barrels a day maybe more realistic for when the – the asset closes in the late 1Q?

BBG: That’s probably the way I would read it Chris. So, they are in the process of completing the three wells and they may be on line by the end of the year. The other nine or something that’s probably more going to happen in the first quarter. And so, I don’t think you’re going to get to that 10,000 barrels a day by the end of December at all. So, you know, it’s kind of, you know they’ve got a little inventory there that we need to work through.

Q: Given the higher IRRs would you be willing to move to rigs up into that location?

BBG: Sure. I mean, I think we’re going to deploy capital to what’s the highest rate of returns, and the best thing for our shareholders. So, obviously you know we’ve got to go through that technical discussion that I was just alluding to. You know we’ve got to get you know pick the places, go get some permits you know do some of that back office type of stuff. But clearly, our intent would be to rank the project areas and drill the highest rate of return areas first, and you know deliver the best value.

Q: And then just bigger picture question. Do you have any color in terms of just how this acquisition came to be? You know, why this, why now?

BBG: You know that’s kind of interesting. Mike Starzer, who is the CEO of Fifth Creek, and I had lunch one day, and you know he was explaining his asset to me, and I was explaining our asset. And you know through the series of several lunches you know, we kind of got to where we kind of really had the same vision and the same strategy.

I got more and more excited about their asset, the quality of their asset, and what they were trying to do on their asset. And I think, Mike got more and more impressed with our execution of delivering 12 quarters in a row of production results and cycle times in capital efficiencies. And then we’ve talked about just kind of our vision for the ongoing development in the basin.

For the ongoing development in the basin, and the ongoing opportunities for consolidation. It just seemed like we had the same strategic vision of how to develop the acreage and – and how to look forward about the DJ Basin and that philosophy seemed just kind of carry forward, when we brought in his private equity sponsor in NGP, it just seemed like all three of us had the same strategy, the same vision and it just seemed like it was a good marriage, and it just kind of the more we discuss, the more we liked it, and the more all of us got enthused and it just kind of came together.

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