Two mergers involving smaller upstream producers continued the brisk trend for corporate combinations in the week starting May 9, as the struggle to attain scale, whittle down costs and competitively reward shareholders in an increasingly austere operating environment has kept courtships in the exploration and production sector active.
Bonanza Creek agreed to merge with Extraction Oil & Gas May 10 for $2.6 billion in an all-stock deal between two public operators in the DJ Basin of Colorado. After closing in third-quarter 2021, the new combined company will be known as Civitas Resources.
A day earlier, public E&P company Laredo Petroleum, which operates in the Permian Basin of West Texas, in the eastern Permian also known as the Midland Basin, agreed to acquire private equity-funded Sabalo Energy, a portfolio company backed by EnCap Investments for $715 million.
The Bonanza Creek/Extraction deal will create a company with 117,000 boe/d of production, 65% liquids and 40% oil. About two-thirds of the production will come from Extraction, as well as a little more than 50% of the combined 425,000 net acres, the companies said.
"Civitas will take to the next level an E&P business model that has been actively pursued by both Bonanza Creek and Extraction," Tom Tyree, CEO of Extraction, said in a conference call to explain the deal. "The model is defined by operational discipline, commitment to free cash flow, alignment with shareholders ... and best-in-class governance."
During the call, the companies' CEOs said the merger creates a leading energy producer in Colorado's DJ Basin, an area where production has been stable most of this year at 372,000 b/d of oil and 2.19 Bcf/d of gas, according to S&P Global Platts Analytics.
That compares to about 585,000 b/d and 2.45 Bcf/d in January 2020, essentially pre-pandemic.
Platts Analytics expects essentially flat DJ Basin oil output for the rest of this year, rising slightly to around 428,000 b/d in 2022 and 437,000 b/d in 2023.
"We support the enterprise with a rock-solid balance sheet with pro forma leverage at 0.3x EBITDA," Tyree said, a very low level. Most E&Ps recently have attempted to hold debt/EBITDA at 1x to 2x. "And [the business has] a free cash flow yield of over 20% and a commitment to return a meaningful share of that cash to our shareholders."
DJ deal acreage is complementary
Bonanza Creek CEO Eric Greager, who will hold that position in the combined company, noted the companies' acreage is complementary.
"It's obvious there will be opportunities for operational and marketing optimization ... operating efficiencies, gathering and marketing optimization and accumulation of synergies, as well as disciplined inorganic growth," Greager said.
The pair had been talking about a combination since mid-2020, when Extraction was "running a process" for a merger/acquisition inside of its Chapter 11 restructuring, he added. "That process allowed us to get pretty close to the team and a pretty detailed understanding of the assets," Greager said.
Extraction's chairman, Ben Dell, will serve as Chairman of Civitas.
As for the Laredo-Sabalo combination, its impact is expected to be "transformational" for Laredo, Jason Pigott, Laredo's president and CEO, said in a statement.
"Upon closing, we will ... have more than 30,000 highly productive, contiguous net acres in Howard County and a near-term pathway to increasing our oil cut to more than 50% [by year-end 2021] from the current 30%," Pigott said.
"The value derived from employing our efficient, low-cost operations in Howard County has already been established on our current leasehold and we expect to perform equally well on this new acreage," he said.
Terms of the acquisition, which is expected to close July 1, 2021, are a cash payment of $625 million and roughly 2.5 million shares of Laredo common shares.
Civitas expects flat to 1%-2% production growth over the long term and to reinvest less than 50% of its EBITDA, KeyBanc analyst Leo Mariani, noted in a May 10 investor note.
E&P companies have been reinvesting lower percentages of their cash flows and returning more cash to shareholders this year.
"Bonanza Creek also said it is well positioned to be the preferred consolidation partner in the DJ," Mariani said.
