It was only a matter of time before Eagle Energy Trust announced a new acquisition. The CEO has been hunting for a new asset for the past months which finally ended with the US$113 million dollar acquisition announcement in the Permian Basin, Texas. The new asset base diversifies Eagle’s portfolio but it also ensures the sustainability of the distribution goes beyond the original 3 year time frame the company had with its Salt Flat field. Let’s review the impact of this latest acquisition along with the sustainability of the dividend going forward.
The Acquisition Agreement was signed on April 30, 2012 and has an effective date of April 1, 2012; the closing date will be May 18, 2012. Eagle Energy is acquiring 92.5% interest in Permian Basin oil and natural gas properties located in the counties of Martin and Palo Pinto in the State of Texas for a total purchase price of approximately US $113,369,688. The Acquired Assets are on approximately 3,175 (2,937 net) acres of land consisting of:
- 2,160 (1,998 net) acres are in Martin County
- 1,015 (939 net) acres are in Palo Pinto County
- 31 (28.4 net) producing wells and overriding royalty interests on 23 unrelated wells
- three (2.76) net non-producing wells, one (0.9 net) salt water disposal well
- about 90 drilling locations (~1 well per 40 acres)
- 600 boed (68% light oil, 20% NGLs, 12% natural gas)
This acquisition increases the portfolio of low risk drilling locations by 3.5 times from 36 locations to a total of 126 locations in both fields. The reserve life index now stands at 15 years thanks to the addition of 8.1 MMboe proved reserves (11.8 MMboe total) and 10.2 MMboe (17.9 MMboe total) proved plus probable reserves as at December 31, 2011. The acreage is mainly located in what is known as the Spraberry Field which is a producing oil field that was discovered in 1943 and covers nine counties in the Permian Basin in West Texas. The wells in the Spraberry Field target a stacked reservoir interval known as the Wolfberry. The Wolfberry consists of multiple oil bearing reservoirs ranging in depth from 8,000 feet to 11,000 feet and includes the Spraberry, Dean, Wolfcamp, Cline, and Strawn reservoirs. This is a vertical frac play where each well is drilled vertically across multiple formations and completed with multi-fracturing at each reservoir. Vertical fracs are cheaper than horizontal fracs and allow a well to produce from a stacked pay zone.
Eagle Energy will be financing the acquisition by using $5.5 million of working capital, borrowing $28.8 million under its credit facility and raising $78,085,000 by selling 7,730,000 shares @ $11.00 with an overallotment option for 1,159,500 shares. Since we’re into money, let’s find out if the trust maintains a sustainability ratio at or below 100%. In 2012, the trust intends to average 2,600 bopd at Salt Flat Field and exit the year at 1,000 boepd at Spraberry Field which means that upon successful execution of the drilling program the trust will enter 2013 with 3,600 boepd in production. For our scenario, I will consider that the overallotment option has been exercised which reduces the debt to $16 million. The operating costs for both fields are similar (confirmed with the CEO) so we will be using the following assumptions:
- 2013 average production 3,600 boepd (97% liquids)
- WTI oil price of $95
- Natural gas liquids at 55% of WTI
- Natural gas price at $2.25 /mcf
The sustainability ratio for the distribution stands at 96% for a capital spending program of $30 million in both fields. The debt to CF ratio is less than 0.5:1 and the drip proceeds can eliminate any outstanding debt in 1 year. The same results would hold true with WTI at $90 and here we are talking about closing the debt in 1 year which the company doesn’t have to do. Eagle Energy can sustain the dividend at much lower WTI prices thanks to its hedges and the 60% drip participation rate.
Eagle Energy Trust EGL-UN.TO 5.62 [+0.08] is among a few oil and gas dividend paying companies that are able to comfortably pay their dividend. While the outlook for oil prices remains strong, investors need to remember the risk of being exposed to one commodity. In my opinion, it will take a global meltdown (which Europe may well trigger) to bring oil prices crashing lower (it would be temporary a la 2008). Moreover, there’s a freebie that comes with the trust; oil production at Salt Flat Field is from the Edwards A formation while in surrounding fields oil is produced from the A, C and D Zones. This year, Eagle will be drilling 1 or 2 wells to test the C and D zones whereby if successful; the inventory at Salt Flat Field may well double. Regardless of the freebie, Eagle remains one of the best dividend players in the energy sector and I expect the share price to soar to new heights in the coming months on the back of successfully meeting its guidance for 2012.
What do you think of Eagle Energy Trust?