Centennial Resource Development Inc. (NASDAQ: CDEV) is entering the Northern Delaware Basin in a $350 million deal for Lea County, N.M., acreage, the company said May 1.

Denver-based Centennial agreed to acquire certain undeveloped acreage and producing properties within Lea in the Northern Delaware from GMT Exploration Co. Centennial intends to finance its purchase through proceeds from one or more capital markets transactions.

The properties include 85% average working interest in 11,860 net acres and are 79% operated. In addition, Centennial said it is adding about 255 gross horizontal drilling locations to its inventory.

GMT does not operate a rig on the acreage, which is north of the Red Hills area. Centennial plans to spend an additional $38 million in capex on a rig and drilling and completion costs.

Located in the sweet spot of the Bone Spring trend, the acquisition further expands the company's footprint into an area with producing horizons similar to its existing acreage, said Mark G. Papa, Centennial’s chairman and CEO.

Centennial says the acreage is “significantly” de-risked by offset operators and is about 67% HBP.Centennial Resource Development GMT Exploration Acquisition Map

“This is an area where our geoscience and reservoir te ams have built their careers and worked these geologic formations,” Papa said in a statement. “Consistent with our strategy, this acquisition fits our high rate-of-return threshold and increases our overall oil-weighting.”

GMT is a privately held independent E&P with assets primarily located in Alaska, East Texas, Montana, New Mexico and Wyoming, according to the company’s website. GMT is headquartered in Denver and also has an office in Houston.

GMT is headed by CEO Thomas E. Claugus, a principal of GMT Capital Corp., a private investment management company with about $5 billion in assets under management.

Highlights:

  • Majority of acreage, roughly 96%, is comprised of state and federal leasehold;
  • Average net production of about 2,100 barrels equivalent per day (boe/d) during first-quarter 2017;
    • About 77% oil;
  • Identified about 255 gross horizontal drilling locations in the Avalon Shale, 2nd Bone Spring Sand, 3rd Bone Spring Sand and Wolfcamp A formations;
  • Estimated undeveloped resource potential of more than 91 MMboe;
    • Additional upside potential from the 1st Bone Spring Sand, 2nd Bone Spring Shale, 3rd Bone Spring Carbonate and Wolfcamp B formations;
  • Significant upside potential related to additional zones and future downspacing;
    • Current inventory includes drilling locations in four zones;
    • Conservative inventory spacing compared to offset operators; and
    • Potential upside from four additional prospective zones.

The acquisition will increase Centennial’s Delaware Basin position to about 88,000 net acres from roughly 76,000 net acres at year-end 2016.

The acreage is significantly de-risked by offset operators and is about 67% HBP. Centennial expects less than one operated drilling rig to hold the acreage, according to a company release. The company plans to add the rig by the third quarter and spud about five gross horizontal wells by year’s end. Four of the wells will be completed and placed on production, Centennial said.

In addition, Centennial expects well results in the Northern area to provide rates of return that are competitive with the company's existing portfolio, Papa said.

Pro-forma for the pending acquisition, Centennial is raising its 2020 production target to 60,000 barrels of oil per day (bbl/d) from the previous target of 50,000 bbl/d. The increase represents a four-year compound annual oil growth rate of about 80% from 2016 to 2020.

The acquisition is expected to close in second-quarter 2017. Latham & Watkins LLP was legal counsel to Centennial. Tudor, Pickering, Holt & Co. was financial adviser to GMT in connection with the transaction.

Emily Patsy can be reached at epatsy@hartenergy.com.

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