A Permian Stampede

Who wouldn’t like to own a stock that gets bought out at a fat premium? Clayton Williams Energy (NYSE: CWEI) investors got lucky that way this week, as the company agreed to be  acquired by Noble Energy (NYSE: NBL) for $3.2 billion, a 34% premium over the prior day’s close.

I’m always on the hunt for takeover targets, so when there is a deal like this I scrutinize the companies involved to see what the buyer might have found attractive. So I fired up my trusty stock screener, and took at look at the metrics for CWEI as of Friday, prior to the announcement. What I found wasn’t pretty.

CWEI has a net debt/EBITDA ratio of 16, far worse than peers. That is bankruptcy territory, and in fact if you look at recent news reports CWEI had been actively shopping itself as its options were running out.

The next thing I would look at is the value of the company’s proved reserves. CWEI had an enterprise value (EV) of $2.4 billion, and proved oil reserves at year-end 2015 of 33 million barrels of oil, 48 billion cubic feet (BCF) of natural gas, and 5.5 million barrels of natural gas liquids (NGLs). On a barrels of oil equivalent (BOE) basis, that EV works out to be about $52.45/BOE — again far richer than its competitors.

For comparison, consider EOG Resources (NYSE: EOG). EOG is one of the largest independent oil and gas producers in the U.S. It trades at a debt/EBITDA ratio of 2.5 and an EV/reserves of $31.49/BOE. ConocoPhillips (NYSE: COP), the world’s largest independent oil and gas producer, has faced criticism over its debt/EBITDA of 6.8. Meanwhile, its EV/reserves ratio is a paltry $10.68/BOE.

So if you were screening for bargains, CWEI certainly wouldn’t have fit that bill. Why, then, would Noble have paid a 34% premium for the company?

It primarily comes down to the potential of the southern Delaware Basin, a prime spot in the Permian Basin. From the Noble Energy press release announcing the acquisition:

“We have been very disciplined in assessing expansion opportunities in the Delaware Basin and are extremely pleased to have reached this agreement with Clayton Williams Energy. This transaction brings all the key elements we value: excellent rock quality, a large contiguous acreage position adjacent to our own, and robust midstream opportunities, reinforcing the Delaware Basin as a long-term value and growth driver for Noble Energy.  This combination creates the industry’s second largest Southern Delaware Basin acreage position and provides more than 4,200 drilling locations on approximately 120,000 net acres, with over 2 billion barrels of oil equivalent in net unrisked resource.”

The primary objective of the acquisition is CWEI’s drilling rights on 71,000 contiguous net acres in the core of the southern Delaware Basin, directly adjacent to Noble Energy’s leaseholds on 47,200 net acres. There are an additional 100,000 net acres in other areas of the Permian Basin, but the focus is on the southern Delaware Basin acreage. Noble noted in its press release that the purchase price represents approximately $32,000 per core Southern Delaware acre, with additional value assigned to other production areas, CWEI’s midstream assets and synergies.   

The price paid is in the ballpark of what ExxonMobil (NYSE: XOM) paid this week for private holdings in the Permian Basin. The company announced a $6.6 billion deal for 275,000 acres from the Bass family, which works out to $24,000 per acre.

The obvious question for investors is “Who might be next?” In an upcoming issue of The Energy Strategist we will be reviewing the recent deals in the Permian Basin and discussing the major acreage holders of the region in search for bargains and the next big score.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

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Lyubov Litvin

Lyubov Litvin

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