SandRidge Energy (NYSE:SD) is expanding outside the onshore United States through the acquisition of a private oil and gas company with operations in the Gulf of Mexico. The company believes that assets here are being undervalued by an industry that may be obsessed with shale and other unconventional resource plays. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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SandRidge announced the purchase of Dynamic Offshore Resources, LLC, a private oil and gas company with properties located mostly in the shallow water of the Gulf of Mexico. The company will pay a total consideration of $1.28 billion, with $680 million in cash and the balance through the issuance of 74 million shares of its common stock in the deal.
Dynamic originally planned to go public through an initial public offering and filed the required documents with the Securities and Exchange Commission in January 2012.
Its current production is approximately 25,000 barrels of oil equivalent (BOE), with 50% of this production composed of crude oil. The company reported proved reserves of 62.5 million BOE at the end of 2011, with a PV10 value of $1.9 billion.
It has a diverse production base with output from 270 wells and interests in 250 offshore leases in both state and federal waters.
One deepwater property that Dynamic is involved with is the Bullwinkle Field, located in Green Canyon Blocks 65, 108 and 109. Superior Energy Services (NYSE:SPN) purchased the field and associated platform from Royal Dutch Shell (NYSE:RDS.A, RDS.B) in 2010. The company then sold a 49% interest to Dynamic, which operates the field.
Production Handling Fees
Dynamic also receives revenue by processing production from other nearby oil and gas fields through the Bullwinkle platform. The platform has a capacity of 160,000 barrels of oil and 320 million cubic feet of natural gas per day.
SandRidge expects revenue from third party processing to grow as more fields are developed nearby. One operator that uses the Bullwinkle platform to handle production is Marathon Oil (NYSE:MRO), which operates the Droshky Field. This field started production in 2010 and is expected to peak at an estimated 45,000 BOE per day.
Bullwinkle and five other offshore fields comprise the majority of the PV10 value of the company's proved reserves. The names of the fields and production as of November 2011 are:
South Marsh Island 41 - 1,835 BOE per day
South Pass 60 - 2,208 BOE per day
West Delta 79/80 - 1,395 BOE per day
Vermilion 362-371 - 1,685 BOE per day
Vermilion 272 - 830 BOE per day
SandRidge received little approbation from the market after the deal became public, and saw its stock decline 10% on the day the deal was announced. The company believes that the acquisition fits in with its strategy of being the first to pursue oil opportunities in areas that are undervalued by the market. It compares the purchase to the company's acquisition of Arena Resources several years ago, which boosted its position in the Permian Basin at a low cost.
The Bottom Line
Although SandRidge Energy's recent acquisition of Dynamic Offshore Resources was not well received by the market, this is not necessarily a negative as most investors tend to consider short-term factors. This deal could pay off long-term for the company. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.