Riviera Resources dice adios to the Arkoma

All,

On 11 December 2018, Riviera Resources, Inc. (“Riviera”) announced that it signed a definitive agreement to sell its interests in properties located in the Arkoma Basin in Oklahoma to an undisclosed buyer for a contract price of $68 million, subject to closing adjustments. For those who do not remember the sad saga of Linn Energy, Riviera = Linn Energy - the Linn Energy assets that were contributed to Roan Resources. Since there haven’t been many large trades in the Arkoma recently, Berlin thought it would be appropriate to analyze the metrics and valuations reported in the press release.

Snapshot of Berlin’s assumption of the operated wells under contract

Production

Riviera agreed to sell approximately 24 MMcf/day of net production. It was reported that this equated to proved developed reserves (PV-10) valued at $61 million. Berlin believes this might be slightly misstated as $61 million seems like a lot to pay for 24 MMcf/d, but if the bank who is loaning other people’s money to you says it okay to misconstrue the allocated value then it must be okay...maybe. It is Berlin’s estimate that these assets are generating ~$1.23 million / month (24,000 mcf / day * $2.86/mcf * .80 * .75 * 30 days).*

Land

If the production valuation is accurate, then Ms. Undisclosed Buyer will purchase 37,000 net acres for $7 million, a whopping sum of $189.19 / net acre. Assuming that it is all held by production (HBP), that might turn out to be quite the trade. Using data hastily queried from Oseberg’s Atla platform, the average one year pooling bonus delivering an .8125 NRI in Coal, Hughes, and Pittsburg counties in the past twelve months lies between $550 and $650 per net acre. While some of the Riviera acreage might be burdened below an .8125 NRI, it is most likely inclusive of more formations than the pooled acreage and it is HBP. Buying at ⅓ the price of your offset competition is usually a good thing and will enhance the opportunities to earn a multiple of your purchase price upon exit.

Operations

It is Berlin’s estimate that Riviera is selling 192 operated wells (174 horizontal (mostly woodfords), 18 vertical). The wells are predominantly located in Coal (94), Hughes (63), and Pittsburg counties (20). Since activity has cooled in the Arkoma and Riviera is not running a drilling rig in the prospect, Berlin reckons that Ms. Undisclosed Buyer will not immediately contract a rig to drill the already HBP’d acreage.

Potential Purchaser

At a $68 million purchase price, the universe for potential buyers is quite large. If there were more transactions in the Arkoma, it would make sense for one of the many private equity backed concerns to drag this asset along into a larger trade. However, since no large company has started to consolidate the PE shops and those PE shops seem to be settling down into their marathon paces, the PE shops should be excluded as a potential buyer. More than likely, the buyer is either a family company who already operates wells in the area such as Sanguine Gas Exploration, or one of the institutionally backed operating companies who seem to have a hurdle rate that barely clears the LIBOR; Scout Energy, Merit Energy, Foundation Energy fit this mold.

It will be worth the squeeze if Arkoma mania ever strikes again…and it will.

The Juice

If gas ever becomes the new oil (again) and companies (because Wall Street tells them to) start increasing their desire for gas reserves then this could prove to be a lucrative purchase for the buyer. She’s not paying a premium for the production and the acreage is coming over for the price of a couple sections of SCOOP acreage. It would be a home run if a big lease play sweeps through the basin à la 2007/2008 and she can exit for $2000 plus / acre .

If you have any additional comments or you would like to point out an error in Berlin’s math or reasoning, please drop a line below.

More to follow,

Berlin

*0.80 is the estimate of the NRI of the leases, and 0.75 is the estimate of the ratio of operating expenses to revenue. Berlin is not literate to the point where she can make footnotes in a blog post.

Coal County SITREP

Oklahoma Oil and Gas Mineral Owners,

The Arkoma Basin has been playing second fiddle to the STACK for some time now, but the sleeping gas giant appears to be rubbing the sleep from its eyes. Leasing and transaction activity is accelerating in Coal County, Oklahoma. In the last twelve months, there have been 1739 oil and gas leases filed of record in Coalgate by numerous operators and brokers

There have been five companies in the past year who have been granted Pooling Orders in Coal County by the Oklahoma Corporation Commission. For this discussion, Pooling Orders will be our metric to measure presence and activity level in Coal County. The Companies and the number of Pooling Orders issued are detailed on the chart below.

Company	Number of Pooling Orders
Bravo Arkoma, LLC	9
Canyon Creek Energy Operating, LLC	7
Pablo Energy, LLC	6
Newfield Exploration Mid-Continent, Inc.	3
BP America Production Company	1

The chart deserves a bit more analysis. With its enormous legacy position from the Amoco days, it is not surprising to see some activity from BP. With a market capitalization of $100b, I’m not sure what moves the needle for BP, but I don’t think it is a Hunton/Sylvan test in Coal County. Bravo and Canyon Creek are the two operators to watch. With Pooling Orders covering from the Hartshorne to the Arbuckle, it will be interesting to observe how their positions develop. It appears from the 1002As that have been filed, Bravo is exploiting the Woodford while Canyon Creek is exploiting the Cromwell and Woodford.

Title is just nasty in the Arkoma and Coal County is no exception. Minerals tracts can be cut 100 ways. The only consolation is that most of the historical production has been spaced on 640 acres which does make the held-by-production title work a bit easier in contrast to the Golden Trend. Remember to contact Berlin, if you are wanting to buy mineral rights or sell mineral rights in Oklahoma, specifically Coal County. Standby for further reporting on developments in the Arkoma.

More to follow,

Berlin