Rosehill secures 4,565 acres in Pecos County

Rosehill Resources (ticker: ROSE) announced a significant Delaware Basin acquisition today, doubling the size of the company in a single transaction.

Rosehill will buy 4,565 net acres in northwestern Pecos County, for a purchase price of $77.6 million. As Rosehill currently holds 4,645 net acres, this doubles the company’s size in a single stroke. The transaction gives Rosehill the option to buy another 4,535 net acres for the same acreage cost, which, if exercised, would mean the company will have tripled its holdings in the Delaware.

The acreage acquired is largely contiguous, which supports the use of longer laterals in development. Rosehill reports that nearby operators include Jagged Peak (ticker: JAG), Parsley (ticker: PE) and Diamondback (ticker: FANG).

Rosehill Doubles Size with Delaware Acquisition

Source: ROSE Investor Presentation

Rosehill paid $17,000/acre, well below the basin average of $26,500

The deal is purely an acreage acquisition, as the properties currently have minimal production of 40 BOEPD, from four old vertical wells. The purchase price equates to an acreage valuation of about $17,000 acres, which is well below the average in the Delaware.

According to PLS’s M&A database, the weighted average acreage valuation in the Delaware in 2017 is just under $26,500/acre, which means Rosehill has paid only 65% of the average. On the other hand, Jagged Peak announced in its Q2 release that it had organically leased 1,800 net acres in the same area as the Rosehill acreage. Jagged Peak paid $25.7 million in this activity, meaning it paid just under $14,300 per acre.

New valuation metric: price equates to $240,000 per drilling location

Rosehill President and CEO Alan Townsend brought up an uncommon metric in the company’s release. “We are excited to acquire an attractive acreage position in Pecos County at less than $500,000 per drilling location.”

Expressing an acquisition in terms of price per drilling location is not common, but it is a logical metric to use. A well in a given area may be economic when considered in isolation, but a high cost of acreage can ruin the economics. Rosehill reports that it has acquired over 325 gross locations in the transaction, giving a price of just under $240,000 per location.

If Rosehill had paid Townsend’s referenced benchmark of $500,000 per location, for this acquisition the overall price would have come it at about $160 million, or $35,500 per acre.

It is worth noting that the strong returns of the average Delaware Basin well mean acreage cost is not as important, but it can still affect the IRR of the project. Based on EnerCom Analytics’ well economics models, a well cost increase of $500,000 will reduce the IRR of the well by about 3%, while an extra $240,000 reduces IRR by about 1.5%.

This analysis assumes that all available locations are drilled, and development begins immediately. But those factors are going to be guided by the availability of development capital. Drilling and completing some 325 locations promptly would require a significant capital investment. Even developing the area over a two-year period would require nearly as much activity as Jagged Peak and Diamondback put together.

Funding through mix of equity and debt likely

Rosehill has not released the means by which it will fund the acquisition, but has stated that it will likely use preferred equity, debt or a combination of each. The company currently has a market cap of $57.2 million and $20 million drawn from its $55 million revolver.

If the acquisition is entirely funded by debt, Rosehill’s debt-to-market cap will rise to about 170%, above the level where high debt loads become the main focus of markets. This suggests that it would be advantageous for the company to use a mix of equity and debt, with at least about $15 million in equity.

Rosehill said the acreage delivers horizontal potential in multiple Wolfcamp A, Wolfcamp B and Bone Spring benches along with deeper Wolfcamp horizons.

Pecos County eighth-most popular Permian county

While Pecos County, the location of the purchased acreage, is directly adjacent to the most popular county in the Permian, Reeves, it has significantly less activity. Based on drilling permits issued by the Texas Railroad Commission, Pecos County is the eighth-most active county in the Permian, with 284 permits approved from January to September.

Rosehill Doubles Size with Delaware Acquisition

Source: EnerCom Analytics

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