EOG Resources Inc. (EOG - Free Report) has entered into a definitive agreement with Yates Petroleum Corporation. Per the terms of the agreement, EOG Resources has agreed to combine with Yates Petroleum Corporation, Abo Petroleum Corporation, MYCO Industries, Inc. and certain other entities (collectively, Yates).
Yates, which is a privately held, independent crude oil and natural gas company, has net acreage of 1.6 million in western United States. The company drilled its first commercial oil well in 1924 on New Mexico state trust lands. Since then, it has gained a rich acreage position across the western United States.
Yates produces 29,600 barrels of crude oil equivalent per day, net. Of this, crude oil accounts for 48%. Also, the company has proved developed reserves of 44 million barrels of oil equivalent, net.
EOG Resources, on the other hand, is the largest oil producer in the Lower 48, with average net daily production of 551 thousand barrels of crude oil equivalent. The company is reputed for technological leadership in the development of unconventional resource plays.
The combination of EOG Resources’ strong technical competencies with the massive resource potential of the Yates acreage is expected to create significant value for shareholders of both companies.
EOG Resources' inventory of premium drilling locations will grow by 40% as Yates immediately adds an estimated 1,740 net premium drilling locations in the Delaware Basin and Powder River Basin. Per EOG Resources, the deal will be highly value accretive as a premium drilling location is defined as a direct after-tax rate of return of at least 30% assuming a $40 flat crude oil price. EOG Resources intends to begin drilling on the Yates acreage in late 2016 and additional rigs are likely to be added in 2017.
Yates holds net acreage of 186,000 stacked pay in the Delaware Basin in New Mexico. This acreage is believed to be highly prospective for the Wolfcamp, Bone Spring and Leonard Shale formations. Hence, the aforesaid agreement will result in the combined company gaining a total Delaware Basin acreage position of about 424,000 net acres, up 78% from EOG Resources' existing holdings.
Moreover, Yates has 138,000 net acres on the Northwest Shelf in New Mexico that is prospective for the Yeso, Abo, Wolfcamp and Cisco formations. These shallow plays are capable of contributing additional amounts of premium inventory through the usage of EOG Resources' advanced completion and precision targeting technologies and low cost structure. Apart from EOG Resources' existing acreage, the combined company will have access to 574,000 net acres in the Delaware Basin and Northwest Shelf.
Also, Yates will add 81,000 net acres from the core development area of the Powder River Basin, which is prospective for the Turner Oil play, to the combined entity. Overall, Yates adds 200,000 net acres in the Powder River Basin. This will double EOG Resources' total Powder River Basin acreage to 400,000 net acres. The enriched acreage position has substantial exploration potential for multiple stacked-pay formations.
Other than the position in Delaware Basin, Northwest Shelf and Powder River Basin, the combined company will gain access to Yates’ additional 1.1 million net acres in New Mexico, Wyoming, Colorado, Montana, North Dakota and Utah.
Under the terms of the private, negotiated transaction, EOG Resources will issue 26.06 million shares of common stock valued at $2.3 billion and pay $37 million in cash. At the closing of the transaction, EOG Resources will assume and repay $245 million of Yates’ debt. It will be partially offset by $131 million of projected cash from Yates. The transaction is scheduled to close in early Oct 2016. Following the transaction, EOG Resources intends to maintain Yates' office in Artesia, NM, to support the newly combined operation. All are subject to certain closing conditions.
EOG Resources currently carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector are Murphy USA, Inc. (MUSA - Free Report) , NGL Energy Partners LP (NGL - Free Report) and Enviva Partners L.P. (EVA - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).
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