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Silver Run’s asset base, balance sheet and CEO are all top-of-class

This acquisition company is a triple threat

Jody Chudley is is a contributor to Agora Financial’s Outstanding Investments and Real Wealth Trader.

Sep 30, 2016

by Jody Chudley

The Play
“There has been a lot of recent excitement about the Delaware Basin, but we believe its potential is still significantly underappreciated.”

The Delaware Basin, in southwest Texas, has long played second fiddle to the more prolific Midland Basin located 100 miles east. Both are part of America’s largest oilfield, the Permian.

With acreage costs below those of the Midland and a recent change in drilling results, the Delaware is starting to get a lot more attention.

Devon Energy reported at an investor conference last month that wells it is drilling in the Delaware are generating twice as much oil and gas as wells drilled there two years earlier. Resolute Energy just had its share price surge on its second quarter operations release that said production beat expectations by a wide margin and that Resolute expects ultimate recoveries from its Delaware wells to be 50 per cent higher than previously expected.

With these increases in productivity, and cost efficiencies improving all of the time, the Delaware is now one of the lowest-cost places to drill for oil in North America. There is no better indication of how attractive this play has become than who just decided to join the party.

The Pick

Silver Run (NASDAQ: SRAQU)

37-sliver-run-top-of-class-story

While such titles aren’t presented, Mark Papa is in the running for the best shale oil executive in the U.S. award. While running EOG Resources a decade ago, Papa realized the U.S. oil and gas industry was going to flood the market with shale gas. He gathered his troops together and told them to stop looking for gas immediately and start finding oil.

They did as instructed and EOG locked down best-in-industry land positions in the Bakken and Eagle Ford before most competitors had a sniff of what was going on.

Of course this didn’t save EOG from the result of a commodity price collapse. The industry, fueled by easy money, managed to collapse the price of oil just as it had natural gas.

What further set EOG apart was how Papa built the company. With a focus on return on capital invested rather than pedal-to-the-metal growth, EOG has weathered the oil collapse better than most.

Papa retired from EOG in 2014 but returned this year with a company called Silver Run Acquisition Corp (SRAQU). Silver Run is what is known as a “blank cheque” company. It comes public with a bank account full of cash and no actual operations. Its mandate is to take that cash and make attractive acquisitions.

In the case of Silver Run, Papa had $450 million at his disposal.

So here is the set-up.

The top shale oil CEO is given $450 million to go out and buy a shale oil asset. Not only that, he gets to do it two years into an epic oil collapse when sellers are desperate to sell and asset prices are as depressed as they could possibly be.

What does Papa buy? A private Delaware Basin producer. If there is a better indication of the true quality of this play, I don’t know what it would be.

The private company that Silver Run acquired is Centennial Resource Production. Papa’s comments on the acquisition tell the story: “Since our IPO, we have been searching to acquire a meaningful position in one of North America’s premier oil shale basins. There has been a lot of recent excitement about the Delaware Basin, but we believe its potential is still significantly underappreciated. Centennial has an enviable position in the Delaware’s southern oil-rich core.”

The Postscript

To help fund this significant acquisition, Silver Run raised $1 billion of cash to go with the $450 million it already had. After closing, the company will have a debt-free balance sheet with $100 million in the bank. Silver Run will adopt the name Centennial Resource Development and trade on the NASDAQ stock exchange under the ticker symbol “CDEV.” It has about 7,200 boe/d of net production and 48.6 million boe of net proved reserves. All of this will position the company as one with a great asset base, a great balance sheet and a great CEO. With a little help from the price of oil, this could be a great long-term story.

Jody Chudley doesn’t own shares of SRAQU

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