Comparing The Sandridge Energy And Rosetta Resources Permian Basin Transactions

Mar.18.13 | About: SandRidge Energy, (SD)

Valuing energy companies is no easy task. Not all barrels being produced are created equal, every company has a slightly different asset mix and not every company is equally good at drilling and producing wells.

The best way that I know how to try and value these complicated beasts is by taking my valuation signals from arm's length transactions between profit motivated parties.

There have been two pretty major asset sales in the Permian basin in recent months. I thought it would be useful to have a look at those transactions and try and get a handle on what the going rate is for Permian Basin assets.

Rosetta Resources (NASDAQ:ROSE) Purchases Permian Assets From Comstock Resources (NYSE:CRK)

Purchase Price - $768 million

Production - 3,300 barrels per day (73% oil)

Price Per Flowing barrel - $768 million / 3,300 = $232,727

Drilling locations - 800

Price Per Drilling Location - $768 million / 800 = $960,000

Acres - 53,306

Price Per Acre - $768 million / 53,306 = $14,407

Risked Resource Potential - 145 million barrels (67% oil)

Price Per Barrel of Risked Resource - $768 million / 145 million = $5.29

The data used above comes from the company press release on the transaction linked earlier, and the presentation slide included below.

Click to enlarge

Reason For Transaction - "This oil-targeted acquisition is an important next step in Rosetta's strategy to pursue new growth opportunities and build our inventory of long-lived, oil-rich resource projects. These assets complement our Eagle Ford properties and are a good fit with the experience and technical knowledge of our operations team," said Jim Craddock, chairman, CEO and president. "This transaction provides entry into the prolific Permian Basin with both existing production and strong growth potential in proven delineated areas as well as prospective exploration targets on undeveloped acreage. The addition of new capital project inventory provides competitive options as we prepare to deploy the free cash flow generated by our Eagle Ford assets."

Sandridge Energy (NYSE:SD) sells Permian Assets to Sheridan Production Partners II

Sale Price - $2.6 billion

Production - 24,500 barrels per day (67% oil)

Price Per Flowing barrel - $2.6 billion / 24,500 = $106,122

Drilling locations - 7,600

Price Per Drilling Location - $2.6 billion / 7,600 = $342,105

Acres - 225,000

Price Per Acre - $2.6 billion / 225,000 = $11,555

Risked Resource Potential - 538 million barrels (67% oil)

Price Per Barrel of Risked Resource - $2.6 billion / 538 million = $4.83

The data used above comes from the company press release on the transaction linked earlier, and the presentation slides included below.

Click to enlarge

Click to enlarge

Reason for the Transaction - Tom Ward, SandRidge's Chairman and CEO, commented, "This is a great outcome for our shareholders. The sale of the Permian assets at this time has allowed us to capitalize on current strong valuations for mature, conventional Permian assets and generate a very strong return on our investment there."

Noting that the Permian Basin assets were a key part of SandRidge's planned strategic transition from a natural gas producer to an oil rich E&P company, Ward added, "With these proceeds we will have a cash balance of almost $3 billion and liquidity of over $3.5 billion, which we intend to use to reduce debt and strengthen the balance sheet. This will also allow us to fund development of our acreage position as well as future opportunities in the highly scalable, high return Mississippian Play."

Observations When Comparing the Two Deals



Sale Price






Price Per Flowing Barrel



Drilling Locations



Price Per Drilling Location






Price Per Acre



Risked Resource Potential



Price Per Barrel of Resource



Click to enlarge

The table above puts the two deals side by side. The Sandridge property has been developed further which is why the price per flowing barrel differs between the two.

The two metrics that we can best focus in on are the price per acre and the price per barrel of resource that the companies expect will ultimately be recovered.

That provides us with a range in value per acre of $11,556 to $14,407 and per barrel of recoverable resource of $4.83 to $5.30.

Those are two data points that will come in handy when trying to do initial valuation work on other Permian basin assets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.