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Concho buys assets of PE-backed Three Rivers

by Claire Poole in Houston | Published May 14, 2012 at 2:17 PM

In the latest deal in Texas' sizzling Permian Basin, oil and gas explorer Concho Resources Inc. on Sunday, May 13, acquired the oil and natural gas assets of Riverstone/Carlyle Global Energy and Power Fund IV LP-backed Three Rivers Operating Co. and its affiliates for $1 billion in cash. The agreement pre-empts Three Rivers' planned initial public offering.

The Austin, Texas, target said in a Securities and Exchange Commission filing in January that it intended to list its shares on the New York Stock Exchange under the symbol TROC using bookrunning managers Goldman, Sachs & Co., J.P. Morgan Chase & Co. and Credit Suisse Group. It planned to use the $300 million in proceeds to pay down debt, which amounted to $286 million in September. Riverstone/Carlyle, which invested an undisclosed sum in the company in 2010, and management were also expected to receive proceeds from the sale.

Three Rivers, led by Michael Wichterich, the former CFO of past Riverstone investment Mariner Energy Inc., owns 200,000 net acres in West Texas' and New Mexico's Permian Basin, including large positions in its core northern Delaware Basin play, the Midland Basin Wolfberry play and the emerging southern Midland Basin horizontal Wolfcamp and Cline shale plays. The company earned $82.6 million on sales of $113.7 million for the nine months ending in September.

Global Hunter Securities LLC analyst Mike Kelly wrote in a report Monday that the acquisition was a strategic deal struck at a reasonable valuation in the middle of the red-hot Permian. "If the upside potential of the horizontal Wolfcamp and Cline Shales come to fruition, this deal should generate a high level of shareholder value," he wrote.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. wrote in a report Monday that the price was "decent" at $2,250 per acre, $143,000 per barrel of oil equivalent per day and $17 per barrel of oil equivalent and will be 3% accretive to net asset value and 10% accretive to next year's Ebitda. "Negatives are acquisition [is] a bit gassier with higher LOE [lease operating expense] than current CXO [Concho] asset base, but [they are] minor concerns compared to running room acquired for good price," they wrote.

Three Rivers' properties have estimated proved reserves of 58 million barrels of oil equivalent, half oil and half proved developed, net production of 7,000 barrels of oil equivalent per day and 380 identified horizontal drilling locations in the Delaware Basin, almost all of which are unproved, and 1,100 vertical drilling locations in the Midland Basin, of which more than 740 are unproved.

Concho said the acquisition will boost its net acreage in the Midland Basin by 42% and the northern Delaware Basin by 23%. About 65% of the acreage is held by production. Timothy Leach, CEO of Midland, Texas-based Concho, said in a statement that the deal is the company's largest and most strategic since its purchase of family-owned Marbob Energy Corp. almost two years ago for $1.65 billion.

"Three Rivers represents a material consolidation opportunity within the proven core of the Delaware Basin, a continued expansion into the horizontal Wolfcamp and Cline shale plays in the southern Midland Basin, and a complementary addition to our core Yeso play," he said. "Combined with our existing portfolio, these assets give the company nearly 750,000 net acres across the Permian Basin, with exposure to some of the most exciting oil plays in the U.S."

Leach said the acquisition is expected to be immediately accretive to earnings, discretionary cash flow, production and reserves on a per share basis and provides an additional platform to significantly increase its production in the Permian Basin.

Concho intends to finance the acquisition with borrowings under its $2 billion credit facility, which had $1.8 billion available as of March 31. Concho also plans to sell $200 million to $400 million of some of the noncore assets from the acquisition and its existing assets over the next nine months.

In connection with the acquisition, Concho entered into crude oil swaps on 2.4 million barrels of oil at a weighted average price of $92.90 per barrel for the rest of 2012 through 2017.

Concho has been aggressively picking up Permian assets; it bought Petroleum Development Corp.'s assets in the region for $188 million at the end of last year. In March, the company closed a $600 million 10-year senior notes offering, upsized from $500 million, which priced to yield 5.5%, to pay down its revolving credit line maturing in 2016 and to help it pay for its recent acquisitions.

The deal must clear regulators and preferential rights but is expected to close in July.

Three Rivers has been a busy acquirer over the past two years, buying properties from Chesapeake Energy Corp. in 2010 and Samson Resources Co. last year.

J.P. Morgan's Jimmy Elliott, Chris Conoscenti, Laurence Whittemore, Vean Gregg, Trevor Reuben and Lee Nix and BMO Capital Markets Corp.'s Jon Marinelli, Pete Boukouzis, Shawn Winkler, Brandon White and Taylor Galloway advised Concho. Vinson & Elkins LLP's John B. Connally, Matt Strock, Stephen Szalkowski and Chris Bennett provided Concho with outside legal counsel. Bracewell & Giuliani LLP's J.J. McAnelly and David Sweeney represented Three Rivers. Bracewell's Charles Still Jr. had been counseling Three Rivers on the offering.

-- Paula Schapp contributed to this report.

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