The Deal: SandRidge Sells Gulf of Mexico Assets For $1.1B

NEW YORK (The Deal) - Oklahoma City oil and gas explorer SandRidge Energy (SD) said Tuesday it agreed to sell its Gulf of Mexico properties to Riverstone Holdings-backed Fieldwood Energy  of Houston for $1.12 billion, less than what it paid for them just two years ago.

The price included $750 million in cash and $370 million in abandonment liabilities. SandRidge is keeping a 2% overriding royalty interest in two exploration prospects, including the deep Miocene in Green Canyon 65, known as the Bullwinkle field, and South Pass 60.

SandRidge said the assets had proved reserves of 29 million barrels of liquids as of Dec. 1 and 168 billion cubic feet of natural gas, citing figures from Netherland, Sewell & Associates. The properties produced 23,500 barrels of oil equivalent per day over the past month, 48% of which was natural gas.

Fieldwood said separately that the properties have proved reserves - also according to Sewell - of 57.2 million barrels of oil equivalent, 51% of which is oil, probable reserves of 11.4 million barrels and possible reserves of 9 million barrels, resulting in proved, possible and probable reserves of 77.5 million barrels of oil equivalent. Fieldwood said production exceeds 25,000 barrels of oil equivalent per day and is about 90% operated.

Fieldwood said the acquisition further enhances its position as the owner of the largest asset base on the Gulf of Mexico shelf with a pro forma leasehold of 650 blocks and net production of 125,000 barrels of oil equivalent per day, 54% of which is oil.

"This transaction, coming only three months after the closing of our inaugural acquisition from Apache, demonstrates Fieldwood's continued commitment to our acquire and develop strategy in the Gulf of Mexico," Fieldwood president and CEO Matt McCarroll said in a statement, referring to last year's Gulf of Mexico property purchase from Houston-based Apache Corp. for $3.75 billion. "Additionally, the acquisition adds further geographic and geologic diversity by expanding our business to include an onshore Gulf Coast division as well as the deepwater Bullwinkle field."

McCarroll said he expects the deal will lead to "meaningful" operational synergies and cost efficiencies with the combined asset base and adds several near-term, high-quality prospects to its drilling inventory. "Most importantly, this transaction enhances the financial strength of the company by providing additional liquidity, significant cash flow and further opportunities for growth," he said.

Fieldwood said it is obtained underwritten committed financing for the transaction from Citigroup Global Markets, JPMorgan, the New York branch of Deutsche Bank, Bank of America Merrill Lynch and Goldman, Sachs.

Simmons & Co. International wrote in a report that it values the transaction at $47,660 per barrel of oil equivalent per day for the production and $19.65 per barrel of oil equivalent for the proved reserves, a discount to recent comparable transactions at $66,430 and $27.75, respectively. While it said that might not be an "apples to apples" comparison due to adjustments for plugging and abandonment liabilities or specific production mix, it noted that SandRidge bought the assets in February 2012 for $1.275 billion and that the deal will reduce the $9 per share net asset value it's assigned to SandRidge.

"We appreciate that this transaction will make for a cleaner onshore NAm [North America] focused and liquids levered growth story," Simmons said. "However, we saw no immediate need to divest these cash flow positive assets at this juncture and view this more as a strategic alignment of the business as there was also no need for the incremental capital in the short-term."

SandRidge said it expects the transaction to close in the first quarter and to reinvest the proceeds in its Mid-Continent drilling projects. The company also said it expects production growth of 26% this year, versus its previous estimate of 12%.

SandRidge president and CEO James Bennett said in a statement that given the company's status as a "premier operator" in the Mid-Continent, where it has competitive advantage including infrastructure networks, subsurface knowledge and a "best-in-class" cost structure, it decided to focus its efforts on developing that area. "Based on our confidence in the asset base, we will increase the pace of development in our six county de-risked focus area where we have over a decade of drilling locations," he said.

Bennett added that the transaction provides the company with pro forma liquidity of over $2 billion while maintaining a leverage ratio under 3 times. "Our growing cash flow plus the availability of additional reserves-based borrowings are envisioned to fund our growth strategy," he said.

"SandRidge is now a high growth, Mid-Continent focused company."

On a conference call with analysts and investors, Bennett said the company started contacting potential buyers for the Gulf properties in November, although the list wasn't as long as when it sold its Permian assets to Warburg Pincus-backed Sheridan Production Partners in December 2012 for $2.6 billion. SandRidge sold those properties while under fire from hedge fund investors, including TPG-Axon Capital, which later forced out then-CEO Tom Ward.

One analyst asked Bennett why the company was selling the properties now, when it didn't really need the capital. "The Gulf is a higher risk, more volatile business, masking growth in our onshore business," Bennett replied. "We're at a point now to redeploy that capital into the best return properties. It's the right move longer term for shareholders."

Bennett confirmed that the properties produced around $100 million to $150 million in free cash flow and that sale will remove $250 million to $300 million from its annual EBITDA.

SandRidge said it will add three more rigs in the Mid-Continent in the second quarter, resulting in the drilling of 30 more gross wells. The company said it expects to exit the year with 29 rigs operating in the area, where it said it continues to discover, delineate and develop new, high rate-of-return opportunities.

The company also said it expects to produce 29.3 million barrels of oil equivalent this year, including 1 million from the Gulf before the deal closes, versus last year's estimated production of 22.4 million barrels of oil equivalent after leaving out divested Gulf and Permian properties, resulting in 26% organic year-over-year production growth.

SandRidge said it expects capital expenditures of $1.475 billion this year and that the redeployment of offshore capital expenditures will lead to production of 23.2 million barrels of oil equivalent in the Mid-Continent, representing production growth of 37% over last year.

Fieldwood attracted a $600 million commitment from Riverstone in December with management kicking in another $25 million to focus on acquiring and developing conventional oil and gas assets in North America, including the Gulf of Mexico.

McCarroll leads the company along with other former senior executives of Dynamic Offshore Resources, which became one of the largest operators on the Gulf of Mexico shelf before being sold to SandRidge in 2012 for $1.3 billion. Riverstone backed McCarroll in Dynamic Offshore as well, earning a 3.6 times return on the sale.

RBC Richardson Barr's Scott Richardson advised SandRidge. A Vinson & Elkins LLP team consisting of Doug Bland, Elizabeth Radack, Thomas Crichton, Todd Way, Tan Lu, Daniel Hatch and Christopher Boling provided it with legal counsel.

Timothy Samson at Thompson & Knight LLP and Christopher Brown at Simpson Thacher & Bartlett LLP represented Fieldwood.

Written by Claire Poole.

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