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.

The Crystal Ball and Newfield Exploration

All,

Down goes Frazier and Linn Energy, Sandridge Energy, and Chaparral Energy. All in bankruptcy within a month of each other. American Energy Partners are shutting the doors Newfield Exploration is leaving Tulsa. The patch has seen better days.

The Newfield exit is a bit baffling. It's not surprising that the management teams of publicly traded companies are notoriously selfish, but to close down the office that deploys 80% of the company's capital budget in order for them to maintain their faux bourgeois existence in the Woodlands is a stretch. Despite a top position in the STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties), it is going to be more difficult for them to compete with locally based companies from their perch in Houston. There is something to be said for a company landman to know the local competition and to be able to drive to El Reno if need be to gather intel at the courthouse. Just as Apache's position is unraveling in the Mid-Continent after their retreat to the swamp that is Houston, Newfield could very well fall in their footsteps. It would be quite a treat to see one of the Oklahoma companies force pool Newfield out of everyone of their 42,000 new acres they recently acquired from Chesapeake.

More to follow,

Berlin

When Will Linn Energy, LLC (LINE) Default?

All,

Linn Energy, LLC is a large Mid-Continent operator. By rough estimation, they operate 1484 wells in Oklahoma alone in both the Anadarko and Arkoma Basins. Today, FuelFix, announced Linn expects to break their mortgage covenants in 2016. A bankruptcy announcement will likely follow unless Linn can renegotiate with its lenders. This announcement coupled with the delayed release of Linn's 10-K is an ominous sign for the operator that once delivered large distributions to its shareholders.

Leverage works both ways and many forget that when times are good and borrowed money is cheap. There will probably be little love lost between Linn and its offset operators and working interest partners. Linn has a reputation for being difficult to work with. This plus the fact they like to JIB their partners for pumpers' Coca Cola and new boots while deducting 50%+ from the gas gross revenues leaves many with a bitter taste in their mouths when they think of Linn.

More to follow,

Berlin

The Patch In Oklahoma

Times have been better, but they have been worse. Oklahoma oil and gas operators are in a pinch. Did Chesapeake experience a dead cat bounce today? Will Linn Energy survive to the winter wheat harvest in Tuttle, Oklahoma? Lease prices are down and the litigating is up. The only thing we know about prices is that no private equity shop or big Wall Street bank will ever hit the nail on the head. They will always be wrong. "This time is different," "macro-price environment," "commodity headwinds," "the land grab is over," "SCOOP STACK MERGE," "NAPE was interesting," "lot of cash sitting on the sidelines," "ENCAP or NGP?" It doesn't even matter. It's all a game. Not "the Greatest Game," but a good one. Pawns hand over their money and take a 2%/20% haircut for the chance to sit at the table. It's a resources play they say, don't even need geologists. A damn shame.

More to follow.

Berlin