Deals and IPOs

EOG inks $2.5 billion deal in shift to low-cost Permian oil field

Spencer Platt | Getty Images

EOG Resources said on Tuesday it would buy privately held Yates Petroleum for $2.5 billion in stock and cash, in the latest move by a U.S. energy company to acquire acreage in the Permian Basin, one of the country's most cost-effective oil fields.

EOG's shares rose more than 6.5 percent to close at $94.83 a share Tuesday as analysts said the deal was inexpensive for EOG.

The buyout, which had been under negotiations for months, follows a string of Permian land purchases in the past year by companies that include Pioneer Natural Resources and WPX Energy.

Cramer's Mad Dash: EOG to buy Yates

The Permian is the largest U.S. oil field, with 189 of the country's 481 total active rigs in early August, according to the latest data from energy services firm Baker Hughes.

With the Permian acquisition, EOG would shift its focus away from the Eagle Ford shale, a more expensive Texas field that had helped the company grow into the largest onshore oil producer in the contiguous United States during the past decade. Much of the Permian acreage is near EOG's existing well locations and pipeline infrastructure, boosting its appeal.

"This deal really isn't about getting bigger. It's about getting better," EOG Chief Executive Bill Thomas told investors on a Tuesday conference call after announcing the acquisition.

"We'll be able to grow oil (production) with less capital and more efficiently than we do now."

The company plans to start drilling on the new acreage as soon as the deal closes in October and boost capital spending in the Permian in 2017, he said.

EOG will issue 26.06 million shares valued at $2.3 billion and pay $37 million in cash in exchange for Yates, which was founded by Martin Yates, Jr. in New Mexico in 1907 and is run by his descendents.

The deal would raise EOG's position in the Permian and adjacent plays to 574,000 acres, and double its position in the Delaware Basin in southern New Mexico and West Texas.

Yates, which holds 1.6 million net acres across the western United States, mainly operates in the Permian Basin and the Powder River Basin in northeast Wyoming and produces 29,600 barrels of crude oil equivalent per day.

The purchase by EOG, which has an investment-grade credit rating, reinforces the desire by companies that can afford to make acquisitions to "play offense," Tudor, Pickering & Holt analysts wrote in a note to clients.

EOG said it would assume $245 million of Yates' debt and $131 million of anticipated cash from Yates.

Wells Fargo Securities LLC acted as financial adviser to Yates Petroleum.