Houston oil and gas explorer Midstates Petroleum Co. said Monday, Aug. 13, that it agreed to buy producing properties in the hot Mississippian Lime oil play from Tulsa, Okla.-based Eagle Energy Production LLC, which is backed by Riverstone Holdings LLC, for $650 million.

The price -- for properties in Oklahoma and Kansas -- includes $325 million in cash and 325,000 shares of Series A preferred stock with an initial liquidation preference value of $1,000 per share.

Riverstone principals Pierre Lapeyre and David Leuschen didn't respond to a request for their return on the investment, which was made in December 2009 when Eagle Energy bought assets of Chandler, Okla.-based Special Energy Corp. But one source estimated the firm may have earned a 6 times return on its investment, depending on how much it put into the company over the years. It also may have been planning an initial public offering, the source said. According to a Securities and Exchange Commission filing, Eagle sold $35 million worth of its shares in December 2009.

Midstates expects to close the deal by Oct. 1. The properties include 37 million barrels of oil equivalent of proved reserves that are 35% oil and 23% natural gas liquids; 114 gross producing wells that are 85% operated with an average 67% working interest and 53% net revenue interest; and net daily production of 7,000 barrels of oil equivalent. The properties cover 103,000 net acres, 84,000 of which are in the Mississippian Lime play, with 78,000 in Oklahoma and 6,000 in Kansas, and the remaining 19,000 in the Hunton play in Oklahoma.

Eagle's Mississippian Lime properties have all been developed with horizontal wells; drilling and completion costs have averaged $3.7 million per horizontal well, and the producing fields are in low-cost operating areas with good access to infrastructure. Eagle is using three rigs in its drilling program that it plans to boost to four by year's end.

The deal expands Midstates' drilling inventory by 600 gross drilling locations, all of which are horizontal. Midstates will assume Eagle's hedges on its production.

Eagle expects the deal to be immediately accretive to proved reserves and production per share and accretive to cash flow per share in 2014.

Midstream CEO John Crum said in a statement that the transaction is strategic and transformative for the company.

"The technical team we have assembled at Midstates has the experience and technical knowledge to operate in a wide variety of basins in the U.S., and our new business group continually looks at new opportunities to utilize that expertise," he said. "The properties we are acquiring in the Mississippian Lime play are particularly appealing because they are in a market-recognized, emerging horizontal oil play with good predictability and solid economics."

Crum said Eagle CEO Steve Antry and his staff agreed to continue their work developing the assets during the transition period, which is expected to last one year after closing.

Including the new assets, Midstates will continue to have an oil-weighted proved reserve base of 63.2 million barrels of oil equivalent, 45% of which will be oil, 20% NGLs and the remainder natural gas, and 41% of the total reserves will be proved developed. The average reserve life will increase to 11.3 years from 8.9 years.

None of the Mississippian Lime properties are subject to preferential rights and the leases are held by production or have lease terms that allow Midstates to protect the acreage at a modest drilling pace. They are located in a conventional carbonate reservoir with wells drilled to 6,000-foot vertical depths.

Alex Krueger, president of First Reserve Corp., which kept 41% of its 77% stake in Midstates after its initial public offering in April, said the addition of the Eagle assets to Midstates' portfolio will create synergies and scale that will strengthen its operating platform and provide opportunities for growth. "We support management's strategy to continue to diversify its portfolio into additional emerging plays that complement its Louisiana assets," he said.

Midstates secured $500 million in committed financing from Bank of America Merrill Lynch, SunTrust Robinson Humphrey Inc., Goldman, Sachs & Co. and Morgan Stanley. Midstates may use the proceeds from this financing or a debt offering to fund the cash portion of the transaction and to enhance its liquidity. Midstates said it also secured commitments from SunTrust, BofA, Goldman and Morgan Stanley to increase the borrowing base of its revolving credit facility to $235 million in advance of the transaction close and boost the borrowing base to $250 million, which will help it fund its development program through the end of next year.

The preferred stock dividend is at a rate of 8% per year, which will be payable at Midstates' option in cash or additional amounts added to the liquidation preference value. It can later be converted to Midstates' common stock under certain circumstances at Midstates' direction. The holder of the preferred stock will have certain voting rights and the right to appoint one director to Midstates' board.

Ownership of Midstates at a $13.50 conversion price on the first available date would be 30% public stockholders, 30% First Reserve, 27% Riverstone and Eagle management and 13% Midstates management, founders and employees.

Midstates received financial advice from Evercore Partners Inc.'s Shaun Finnie, Jim Birle, Lloyd Sprung, Lance Dardis, Shane Sealy, Brad Parker, Jordan Webb, Cecil Brown, Patrick O'Shea, Reilly Bliton, Tim Bonstaff and Craig Borque, SunTrust's Jim Warren and BofA Merrill Lynch's Lex Maultsby and John McCready. Baker Botts LLP counseled Midstates, including Hillary Holmes, Josh Davidson, Hugh Tucker, A.J. Ericksen, Carina Sahni, Coleson Bruce, Derek Green, Zackary Pullin, Rob Fowler, Elizabeth Piland, Brandon Essigmann, Scott Janoe, Kim Tuthill, Tom Fina and Stacy Turner. Midstates' in-house counsel is John Foley. Vinson & Elkins LLP represented Riverstone and Eagle, including David Cohen, Marcia Backus and Jim Fox.