Approach Resources (Nasdaq: AREX) has parlayed a nifty piece of profit off a $16.3 million investment in a southern Midland Basin pipeline system, agreeing to sell its part for $108 million.

The deal totals $210 when including the interests of Wildcat Permian Service LLC.

The sale, announced Sept. 19, was something of a surprise given that little value had been assigned to the pipeline, said Irene O. Haas, an analyst with Wunderlich Securities.

“We believe that this is a great move, and the proceeds will lower AREX’s need to borrow and improve liquidity significantly,” Haas said. “This hopefully will silence the bears who predict AREX might have to raise money soon. AREX can now focus on executing its pad drilling program and resume its growth trajectory.”

As part of the deal, buyer JP Energy Development LP entered into a revised crude oil purchase agreement with Approach and Wildcat in which JP Energy will purchase and transport Approach’s crude oil production from 110,000 acres in Crockett and Schleicher counties in Texas.

“The sale of our oil pipeline provides a strong return on our initial investment, further strengthens our liquidity position and continues to provide firm crude oil takeaway from our core operating area,” said J. Ross Craft, Approach Resources president and CEO. “We believe that JP Energy’s … midstream transportation and logistics expertise will help us continue to unlock the potential of our Wolfcamp shale oil play.”

The pipeline system consists of 50 miles of high-pressure steel pipes in Crockett and Reagan counties, with 100,000 barrels per day of throughput, truck terminal, LACT bay facility, multiple receipt points and storage for 40,000 barrels of crude.

“JP Energy is excited to partner with Approach and to extend and diversify our portfolio into the Permian Basin,” J. Patrick Barley, JP Energy’s president and CEO said. “Approach’s management team has a proven track record of developing unconventional oil and gas properties in formations like the prolific Wolfcamp shale oil play.”

The deal is expected to close late third quarter 2013 or early fourth quarter 2014.

Approach Resources has made strides recently. In the second quarter of 2013, its drilling and completion costs declined to $5.7-$5.8 million per well. The company is targeting $5 million per well in 2014.

Approach Resources At A Glance

Permian core
Acres 152,000 net
Unrisked resource potential 1 billion BOE
2013 capital program $260 million
Production growth target 25%

Source: Approach

Approach Resources is planning to complete 40-42 wells using three rigs in 2013, up from its initial forecast of 35-40 wells. The company’s balance sheet also looks stronger for the remainder of 2013 and next year. At mid-year 2013, the company had a $500 million revolver with a borrowing base of $315 million undrawn and total liquidity of $370 million, Haas said.

Assuming a $350 million budget for 2014, “We expect borrowing of $100 million, down from $180 million,” Haas said. “We expect AREX’s net debt to cap ratio to increase from 22% at midyear 2013 to 33% by year-end 2014.”

Without the monetization of the pipeline system AREX’s 2014 year-end debt ratio would have been 39%, Haas said.