Low oil prices force Eagle Ford sale
US shale producer Goodrich Petroleum sold off a chunk of its Eagle Ford acreage in an $118m deal in late July as the cash-squeezed producer looks to pay down debt and fortify itself for a period of low oil prices
Goodrich will sell around 13,000 of its 30,000 acres in the Eagle Ford shale play, which holds 10m barrels of oil equivalent (boe) in proved reserves and produces around 2,850 boe/d, of which around three quarters is oil. It didn’t identify the buyer.
It is among the first deals in the Eagle Ford since the oil price crash and others looking to do deals will be trying to understand the motivation.The deal valued the company’s reserves at $11.80/boe and the land at around $9,000/acre, well off what Eagle Ford acreage was fetching a few years ago. At the height of the land grab, some areas of the Eagle Ford shale play sold for more than three times as much.
Dealmaking in the shale patch is likely to pick up in the second half of the year as financial conditions worsen for weaker shale producers and the hedges that have helped prop up earnings start to expire.
Goodrich has been among the worst hit, with revenues down by more than half in the first quarter of this year, from $51.8m in 2014 to just 24.14m. Falling revenues pushed the company into a loss of $28.5m in the first quarter. That loss would have been even worse but for gains from a well-timed hedge that is seeing the company earn $96/b on around 70% of its oil production.
But is that hedge unwinds, crude prices hover around $50/b and US natural gas prices remain below $3.00/m Btu, Goodrich faces a difficult future. The company’s president Robert Turnham said the company would use the proceeds of the sale to pay down its $52m revolving bank credit and stockpile cash.
Like many of its peers, the company, has slashed spending and drilling this year, but not enough to stave off losses and investors aren’t sold on the company’s strategy. Its share price is down more than 96% from this time last year and lost another 9% on news of the deal.
Wells Fargo Securities analyst Gordon Douthat said the deal was a disappointment and cast uncertainty over the company’s strategy, which is now focused on more frontier shale plays. “The transaction is dilutive from a valuation standpoint, unclear from a liquidity standpoint and leaves the company more of a Tuscaloosa Marine Shale pure play: a higher risk value proposition.”