This morning Atlas Resource Partners (ARP) announced that it will acquire a 25% non-operated interest in the Rangely Field in NW Colorado from Whiting Oil & Gas (WLL) for $420MM in cash. Rangely is an old oil field undergoing CO2 injection, currently producing ~2,900 boe/d net to ARP (90% oil, 10% NGLs), with production in decline at 3 - 4% per annum. Chevron is the operator.
Estimated Deal Metrics:
P/2015e EBITDA = 7.8x
P/2015e EBIT =11.0x
P/Current Production = $145,000/boe/d
P/PDP Reserves = $16.80/boe
P/PV-10 = ???
By our estimates and calculations, the acquisition is dilutive to both ARP and ATLS.
Importantly, Whiting USA Trust II (WHZ) owns a 4.6% working interest in Rangely, and disclosed that 2013 expected total CapEx net to its interest was $3.3MM in 2013 and will be $2.9MM in 2014 (see WHZ 2012 and 2013 10-Ks). The vast majority of this CapEx is capitalized CO2 and other maintenance activity.
"The underlying properties include a 4.6% working interest in the Rangely Weber Sand Unit. Capital is expended each year to purchase CO2 for injection in the field, and capital is also expended for the drilling of additional wells to optimize field recovery. According to information provided by the operator, the 2014 estimated capital expenditures are $2.9 million allocated to the underlying properties’ interest and are comprised of development drilling activities, plant and equipment expenditures and CO2 purchases" (WHZ 2013 10-K, pg. 46).
That means that CapEx net to ARP's 25% working interest equates to $17.9MM and $15.8MM in 2013 and 2014, respectively. The field produces 1.0MMboe per year net to ARP, putting total CapEx/boe at $16.00 - $18.00.
As ARP disclosed, the field is in decline. That means that every $ of CapEx AND MORE that ARP incurs here is truly maintenance CapEx. We don't know what the reported maintenance/growth CapEx split will be yet - we will listen for that info on the ARP CC tomorrow morning - though we suspect that ARP will allocate a significant % of the budget to growth CapEx. If so, how can that be justified? G-CapEx on a field that is in decline...?
Assuming the current WTI strip, a 3.5% annual production decline, the midpoints of guided LOE expense and price differentials, a 7.0% production tax, and no additional OpEx (transportation? G&A?), we estimate that the acquired assets will generate $53.8MM of EBITDA net to ARP in 2015.
We assume M-CapEx of $16.7MM (~$16.50/boe).
Other key assumptions include 50% debt/equity financing, a 9.25% interest rate on the new debt (the same rate that ARP issued senior notes at in 2013), new ARP units issued at $20.00, and a $2.50 LP distribution in 2015 (vs. the 2014 guidance of $2.40 - $2.60), putting ARP in the 50/50 IDR split.
The result is mild dilution for both ARP and ATLS.
A key tenet of the ATLS bull case is that ARP can grow via accretive acquisitions. We believe the bull case is flawed.
We'll have more color on ARP and ATLS after tomorrow's CC (which we expect to be uber-promotional!).