Midstates Petroleum Following the Big Boys (MPO, CHK, APA, SD, DVN, RRC)

Energy exploration & production firm Midstates Petroleum Co. (NYSE: MPO) today announced that it would pay $650 million in cash and stock for 109,000 acres net acres of producing, developed, and undeveloped acreage from privately held Eagle Energy Production LLC. The largest portion of the acquisition is 84,000 net acres in the Mississippian Lime formation in south central Kansas and north central Oklahoma.

The Mississippian Lime has drawn enormous interest in the past year or so from major oil & gas firms like Chesapeake Energy Corp. (NYSE: CHK), Apache Corp. (NYSE: APA), Sandridge Energy Inc. (NYSE: SD), Devon Energy Corp. (NYSE: DVN), and Range Resources Corp. (NYSE: RRC).

For Midstates Petroleum, the acquisition more than doubles the company’s proved reserves on an oil-equivalent-barrel basis. The company’s president/CEO noted:

The properties we are acquiring in the Mississippian Lime play are particularly appealing because they are in a market-recognized, emerging horizontal oil play with good predictability and solid economics.

That last point is worth noting. The pay zone in the in the Mississippian Lime is shallower than in many other oil and liquids-rich regions, such as the Bakken and the Eagle Ford plays. This lowers the cost of drilling substantially, which leads Midstates to say that it expects today’s acquisition to be accretive to production per share immediately and to cash flow in 2014.

The company said it has committed financing of up to $500 million from a number of banks, and may use the financing or a debt offering to fund the cash portion of this deal. The stock part of the deal involves 325,000 shares of Preferred Class A stock may be converted to common stock a year after the deal closes at $13.50/share and must be converted at the end of three years at a price not greater than $13.50/share and not less than $11.00/share. The Prefered stock carries a premium of 8%, payable in cash or more Preferred stock, at the company’s discretion.

Midstates was previously owned by private equity firm First Reserve before its $312 million IPO last April. Following the close of the deal announced today the ownership of the company’s Preferred stock will look like this:

Pro-forma post-acquisition ownership of Midstates at a $13.50 conversion price on the first available conversion date would be 30% public stockholders, 30% First Reserve, 27% Riverstone and Eagle management, and 13% Midstates management, founders and employees.

Midstates also reported second quarter earnings this morning. The company posted a GAAP EPS loss of $1.85/share on $102.6 million in revenues, of which $48 million was a gain on derivative contracts. Adjusted EPS came in at $0.03, above the consensus estimate of $0.01.

Shares of Midstates are down -0.4% at $7.96 in a 52-week range of $7.653-$16.95. Shares rose to $8.56 at one point today.

Paul Ausick