Dallas-based RSP Permian has agreed to pay $2.4 billion in cash and stock for Silver Hill Energy Partners as increasing competition for drilling rights in the Permian Basin in West Texas pushes bids to new records.
RSP is paying the equivalent of $45,000 per acre, a price never seen before in the western section of the Permian known as the Delaware Basin, said Sam Burwell, an analyst at Canaccord Genuity in New York. Acquisition costs in the Delaware Basin are creeping closer to those in the more prolific Midland Basin 100 miles to the east as drillers refine their exploration techniques, triggering more and more gushers.
Oil explorers from Chevron to EOG Resources to Irving-based Pioneer Natural Resources have been accelerating drilling in the Permian region as innovations in horizontal drilling and fracking drive costs low enough to make a profit despite the worst-in-a-generation slump in crude prices. The Permian, a prehistoric sea beneath parts of Texas and New Mexico that produced its first gushers in the 1920s, is one of the few spots in North America where it’s still profitable to drill wells.
RSP plans to finance the transaction with $1.25 billion in cash and 31 million shares of its own common stock, RSP said in a statement. Silver Hill, a creation of private-equity firms Kayne Anderson Capital Advisors and Ridgemont Equity Partners, controls drilling rights to about 41,000 net acres in the Permian Basin of West Texas. RSP offered to sell 22 million shares of stock to help finance the deal.
“We believe the assets of Silver Hill are located in the best part of the Delaware Basin and will be a perfect complement to our existing asset base,” Steve Gray, chief executive officer of RSP, said in the statement. The rights acquired in the deal involve the thickest layers of oil-soaked rocks in the Delaware Basin, RSP said in a presentation on its website. The layers also are among the deepest in the region, which means higher underground pressure that will push more oil to the surface more quickly, increasing profits, the company said.
RSP prevailed over larger suitors for Silver Hill including Occidental Petroleum, Marathon Oil and Noble Energy.
Silver Hill’s assets were highly sought after because the company’s wells targeting a layer of the Permian known as the Wolfcamp outperformed the average output for that zone by about 16 percent, according to Gurpal Dosanjh, an analyst at Bloomberg Intelligence.
RSP’s purchase of Silver Hill is its biggest since the explorer first sold shares to the public in January 2014. The stock (ticker: RSPP) has more than doubled since its debut, even as RSP issued four additional tranches of shares to raise cash. RSP’s share offering Thursday, priced at $39.75 per share, will raise about $874.5 million, the company said in a statement.