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Three Rivers looks to cash in Delaware bounty

High price expected as operator looks to flip large acreage package in key Delaware  portion of Permian basin

Private equity backed Three Rivers Operating III  has signed up advisers from JP Morgan and RBC Capital Markets to negotiate the sale of the company’s assets, which incorporate one of the last and largest acreage packages to be made available in the Delaware section of the prolific Permian basin in the US.

The offering has prompted analysts to debate whether a potential high-dollar acquisition would hurt or help companies looking to add acreage in the hottest onshore play in the US.

The package includes about 60,000 net acres in a concentrated area along the border between Reeves and Culberson counties in the southern Delaware basin and roughly 4000 barrels of oil equivalent per day of production.

With acreage prices in the Delaware basin often trading at $30,000 per acre or more, Three Rivers could bring in more than $1.5 billion for its acreage alone, with additional proceeds for the flowing production.

It is unlikely that Three Rivers is running a dual process, where the company files paperwork for an initial public offering of shares and decides to go public if it does not get the valuation it is looking for through a private sale, as many of its peers in the Delaware basin have done.

Austin, Texas-based Three Rivers III was founded in 2013 with $500 million in backing from private equity giant Riverstone and is led by chief executive Mike Wichterich, who has headed all three versions of the company.

Wichterich has publicly said that he has little desire to deal with the regulatory and public relations requirements that go along with running a publicly listed oil producer.

Assuming a successful sale, it would mark the third time that the management team at Three Rivers has flipped Permian acreage for more than $1 billion.

The first iteration of Three Rivers was sold to Concho Resources for $1 billion in cash and the second version of the company was eventually swallowed by Occidental Petroleum, for a price believed to exceed $1 billion.

The availability of Three Rivers is causing consternation for smaller producers that hold offset acreage. 

Having such a large and contiguous area made available could be a blessing because such opportunities are becoming increasingly rare and the Three Rivers assets are seen as some of the best that could be anticipated to come to market in one package.

However, the cost to complete the transaction could swamp a company’s balance sheet with either a large debt or equity offering.

Analysts at investment bank Capital One Southcoast blamed the spectre of such an arrangement for the underperformance of shares of Carrizo Oil & Gas, which holds 23,000 acres adjacent to the Three Rivers position and has expressed interest in lodging a bid.

“We suspect that the primary reason (for the shares underperformance) is investor concern surrounding the possibility of a high-dollar Delaware basin acquisition that could stretch the balance sheet,” Capital One Southcoast analyst Brian Velie said.

Carrizo’s shares have lagged an index of its peers by 14% in the past quarter.

“Funding a deal of this magnitude, while maintaining the current net debt to EBITDA multiple of 3.2 times, would require a significant amount of equity issuance,” Velie said. “However, we think it's possible that Carrizo gets more creative with the financing and could even bring a non-operating partner into the deal to lessen dilution.”

PDC Energy also has acreage offsetting the Three Rivers position but analysts at Jefferies said the potential purchase price might be a bit steep for the Denver independent. “PDC has acreage on either side of the marketed package, although PDC noted that the package was perhaps a bit larger than what they are currently looking for due to the additional capital requirements” on drilling needed to hold acreage by production, analysts said.