Concho Resources Inc. announced Sept. 3 that it agreed to sell assets in the New Mexico Shelf to an affiliate of KKR-backed Spur Energy Partners for $925 million, which it will use to buy back stock and pay down debt.
Kirkland & Ellis advised KKR, including transactional partners John Pitts, Kyle Watson, David Castro Jr. and Chris Heasley and associates Ben Hardison and William Eiland.
The firm said earlier this year it advised KKR on forming a partnership with Spur to acquire large, high-margin oil and gas production and development assets across the Lower 48 U.S. states.
DLA Piper partner Drew Baldinger and associate Emma Jiang advised Spur.
Gibson, Dunn & Crutcher is assisting Midland-based Concho with a corporate team led by Houston partner Michael Darden and including Houston partner Gerry Spedale and Houston associates Jordan Silverman and Graham Valenta.
Houston partner James Chenoweth advised on the tax aspects and Dallas partner Krista Hanvey assisted on benefits. Capital markets partner Hillary Holmes and associates Harrison Tucker and Melissa Pick advised on Concho’s stock buyback.
Environmental matters were handled out of Gibson Dunn’s San Francisco office and antitrust aspects were covered in Washington, D.C.
RBC Richardson Barr was Concho’s financial advisor led by managing director Craig Lande in Houston.
Concho’s general counsel is Travis Counts, who joined the company in 2013. He previously was VP of legal and deputy general counsel of Halcón Resources Corp. and associate general counsel of corporate at Petrohawk Energy Corp. Before Petrohawk, the Tulane-trained lawyer practiced at Hinkle Elkouri Law Firm.
The divestiture involves around 100,000 gross acres. Concho currently produces around 25,000 barrels of oil equivalent per day from the assets.
As part of the announcement, Concho said its board authorized the initiation of a stock repurchase program of up to $1.5 billion funded in part by the sale. It also plans to use the proceeds to pay down borrowings under its revolver.
Concho chairman and CEO Tim Leach said in a statement that selling the position enables the company to accelerate the value of the legacy assets while focusing its portfolio on opportunities with the highest potential for strong returns.
“Further, the transaction reduces our cost structure and allows us to achieve the leverage target we communicated earlier this year while delivering additional returns to shareholders under an initial $1.5 billion share repurchase program,” he said.
Concho expects to close the transaction in November. The company said it will keep a large presence and development program in southeastern New Mexico and continue to support local communities.
Seaport Global Securities analyst Mike Kelly said there weren’t a lot of details on the sale, including the amount of the assets’ oil production and annual cash flow. But he thinks the market will appreciate management shedding non-core assets and using the proceeds to initiate a buyback on a stock “that is now 25% cheaper” than the day before Concho’s second quarter earnings call on Aug. 1.
Kelly said the assets represent around 8% of Concho’s second quarter production and estimates the deal equates to a proved developed producing value of around $37,000 per flowing barrel of oil equivalent. He noted that the $925 million purchase price represents 5% of Concho’s current enterprise value.
Williams Capital Group analyst Gabriele Sorbara said the announcement didn’t come as a surprise given that Concho revealed the potential of up to $1 billion in non-strategic asset sales on the second quarter conference call and that Bloomberg reported the rumblings of a potential sale on Friday.
Sorbara said the valuation is better than expected, above his estimate of $725 million to $875 million, and that the production is about 59% oil. He estimates that Spur paid $1,750 per undeveloped acre and about 5.3 times next year’s cash flow, “which is rich for mature, higher cost assets,” he said.