WPX Energy pays $2.35B for RKI Exploration’s Permian oil assets

WPX Energy says it intends to increase focus on oil production

WPX Energy Inc. is moving into the Permian Basin an a big way by buying privately held RKI Exploration & Production LLC for $2.35 billion, the company announced Tuesday.

Natural gas producer WPX Energy (WPX.N) is buying oil assets in the Permian basin on the cheap during the recent steep drop in crude prices, acquiring about 92,000 acres in the Permian’s Delaware Basin (in Texas and New Mexico) – at about $12,500 per undeveloped acre, according to Reuters.

Acreage in the basin – the biggest and fastest-growing U.S. shale oil field – was worth as much as $30,000-$35,000 per acre at $100 oil, said Imperial Capital analyst Bob Christensen.

“This is a transformative opportunity that fits perfectly with our strategy to increase our oil production and high-quality oil inventory,” said Rick Muncrief, WPX president and CEO. “RKI’s asset scale and concentrated acreage position allows for efficient, low-cost, multi-decade development in a world-class oil play.

The Permian Basin is characterized by numerous stacked reservoirs, extensive production history, long-lived reserves and high drilling success rates.

RKI also has operations in Wyoming’s Powder River Basin, but those assets are not included in the purchase. RKI will divest or transfer out its Powder River Basin assets before completing the merger, WPX Energy said in a press release.

WPX Energy shares rose as much as 7 percent to $11.88 in morning trading on the New York Stock Exchange on Tuesday.

“We have a plan in place, we’re executing very well and it shows in our results,” Muncrief said. “We believe this transaction will help us take our plan further and execute it faster.”

WPX Energy has grown its oil output from eight per cent of equivalent production to 20 per cent over the past three years. With the transformative RKI transaction, WPX Energy expects oil to account for approximately 22 per cent of equivalent production this year, 30 per cent in 2016, and 36 per cent in 2017 on a pro forma basis, the company said in its release.

Cash margins are also expected to benefit significantly from the transaction. WPX is projecting cash margins to grow approximately 45 percent from more than $13.25 per boe on a standalone basis in 2015 to more than $19 per boe in 2017 on a pro forma basis.

WPX also expects to grow cash flow approximately 25 percent from roughly $3.75 per share on a standalone basis in 2015 to more than $4.60 per share on a pro forma basis in 2017.

Giving effect to the transaction, WPX projects EBITDAX to grow to $1.5-$1.7 billion in 2017 on a pro forma basis. EBITDAX represents earnings before interest expense, income taxes, depreciation, depletion and amortization and exploration expenses.

WPX’s Permian deal is the largest shale acquisition since Noble Energy Inc (NBL.N) announced its $2 billion deal for Rosetta Resources Inc (ROSE.O) in May, according to Reuters.

WPX, which was spun off from Williams Companies Inc (WMB.N) in 2011, said it planned to increase the number of rigs in the Permian to six at the end of the year from four.

With crude prices steadying at about the $50 mark, several oil producers including EOG Resources Inc (EOG.N), Concho Resources Inc (CXO.N) and Devon Energy Corp (DVN.N) are putting rigs back to work.