Permian Resources and Earthstone Energy have announced that they have entered into a definitive agreement under which Permian Resources will acquire Earthstone in an all-stock transaction valued at approximately $4.5 billion, inclusive of Earthstone’s net debt.
Under the terms of the deal, each share of Earthstone common stock will be exchanged for a fixed ratio of 1.446 shares of Permian Resources common stock. The deal strengthens Permian Resources’ position as a leading Delaware Basin independent E&P with over 400,000 Permian net acres, pro forma production of approximately 300,000 Boe/d1 , and an enhanced free cash flow profile to increase returns to shareholders.
These are some of the highlights:
— Enhances leading position in the Delaware Basin and increases operating size and scale
— Adds significant high-quality inventory offset the company’s existing core acreage in New Mexico
— Highly accretive to key financial metrics before synergies, including operating cash flow, free cash flow, and net asset value per share
— Expected to be accretive to free cash flow per share by an average of >30% per year during the next two years and >25% per year during the next five and ten years
— Expect to achieve synergies that will drive ~$175 million of annual cash flow improvement
— Improved free cash flow profile supports a 20% increase to base dividend per share and higher future variable shareholder returns
— Meets and exceeds all of Permian Resources’ rigorous investment criteria
— Maintains strong balance sheet with expected leverage2 of less than 1.0x at closing
— Represents an 8% premium to the exchange ratio based on the 20-day volume weighted average share prices
The deal is expected to be accretive to all relevant per-share metrics before synergies, including operating cash flow, free cash flow, and net asset value per share. And the company expects the transaction to deliver accretion to free cash flow per share of over 30% per year during the next two years and over 25% during the next five and ten-year periods. This is consistent with the company’s disciplined acquisition strategy, pursuing transactions that provide significant accretion to all relevant per-share metrics over the short and long term.
The accretive nature of this transaction immediately improves Permian Resources’ current return of capital program. And the company plans to increase its quarterly base dividend by 20% to $0.06 per share beginning with its first quarter 2024 dividend. Permian Resources’ variable return program remains unchanged, distributing at least 50% of free cash flow after the base dividend through a variable dividend, share repurchases or a combination of both.
The deal adds significant core inventory and bolsters Permian Resources’ position in highly productive areas within the Northern Delaware Basin, characterized by proven stacked-pay intervals and a low-cost operating environment. And Earthstone’s New Mexico acreage position is highly complementary to Permian Resources’ existing high-return asset base, which has generated repeatable strong results. Plus, this transaction provides the ability to high-grade the combined company’s capital allocation across a broader asset base, improving capital efficiency.
The deal increases Permian Resources’ position in the Permian Basin by approximately 223,000 net acres to over 400,000 net acres with pro forma production of approximately 300,000 Boe/d1. In the Delaware Basin, the acquisition adds about 56,000 net acres of high-quality, stacked-pay reservoirs, largely offset to Permian Resources’ existing acreage in Lea and Eddy Counties. Earthstone’s remaining acreage is located in the Midland Basin, and the Company expects to primarily harvest free cash flow from this asset at current commodity prices.
Assuming strip prices, the company expects a net debt-to-LQA EBITDAX2 ratio of less than 1.0x at closing. In connection with the transaction, the Company has secured a $500 million incremental commitment under its credit facility from Wells Fargo Bank, which will increase aggregate lender commitments to $2 billion. And Permian Resources expects pro forma liquidity of over $1 billion at closing, providing significant financial flexibility.
The combined company will also maintain a strong maturity profile, with its first debt maturity in 2026. And the deal is expected to enhance Permian Resources’ credit profile and decrease its overall cost of capital as larger scale and higher production levels accelerate its path to investment grade.
The synergies resulting from the transaction are expected to drive approximately $175 million in annual cash flow improvements, which include $145 million of operational and G&A synergies expected to be fully realized by year-end 2024. And the expected annual operational synergies total $115 million and are primarily associated with reduced drilling, completions and facilities (DC&F), lease operating, and midstream costs. Permian Resources expects to realize significant DC&F savings in the Delaware Basin through improved efficiencies and lower cost structure. The Company expects to reduce LOE expense per-unit through personnel and contract services optimization and enhanced production operations. Additionally, the combined company expects to leverage its enhanced size and scale to optimize pricing across completion, production, and midstream operations.
Permian Resources identified $30 million of annual general and administrative savings. And the combined company is also expected to benefit from a lower overall cost of capital, leading to potential financial synergies of $30 million annually. Permian Resources has proven operational and integration track records and plans to leverage its best practices and lower corporate cost structure to advance cost reductions across all operating expenses and capital expenditures. The all-stock transaction structure allows for both Permian Resources and Earthstone shareholders to benefit from the cost synergies and significant upside potential of the combined companies.
The all-stock deal will consist of 1.446 shares of Permian Resources common stock for each share of Earthstone common stock, representing an implied value to each Earthstone stockholder of $18.64 per share based on the closing price of Permian Resources common stock on August 18, 2023. And Permian Resources will issue approximately 211 million shares of common stock in the transaction. After closing, existing Permian Resources shareholders will own approximately 73% of the combined company, and existing Earthstone shareholders will own approximately 27% of the combined company.
The deal has been unanimously approved by the Boards of Directors of both Permian Resources and Earthstone and is expected to close by year-end 2023, subject to customary closing conditions, regulatory approvals, and shareholder approvals. And Permian Resources’ and Earthstone’s largest shareholders, which currently own approximately 49% and 48% of each respective company’s outstanding shares, have executed a Voting and Support Agreement in connection with the transaction.
Upon closing of the deal, Permian Resources’ Board of Directors will be expanded to consist of eleven directors, including the addition of two representatives from Earthstone. Permian Resources’ executive management team will lead the combined company, with the headquarters remaining in Midland, Texas.
Permian Resources and Earthstone are operating an eleven-rig drilling program in aggregate, primarily focused on the Delaware Basin. And the combined company plans to allocate at least one of Earthstone’s two rigs currently in the Midland Basin to the Delaware Basin. During 2024, the combined company expects to allocate approximately 90% of capital to high-rate-of-return projects in the Delaware Basin, predominantly focused on Lea, Eddy, Reeves, and Ward Counties. And Delaware Basin activity is expected to be weighted slightly more towards New Mexico as a result of the transaction. The Company expects to maintain optionality from the low decline Midland Basin asset base while harvesting significant free cash flow.
The company expects to provide detailed forward-looking guidance for the full-year 2024 early next year and per its annual budgeting cycle. Permian Resources plans to deliver an operational plan that maximizes free cash flow during the near term, depending on strip commodity prices and expected oilfield service costs. The Company remains committed to returning at least 50% of free cash flow after its base dividend through variable dividends and share repurchases.
KEY QUOTES:
“We believe the acquisition of Earthstone represents a compelling value proposition for our shareholders and strengthens our position as a premier Delaware Basin independent E&P. Earthstone’s Northern Delaware position brings high-quality acreage with core inventory that immediately competes for capital within our portfolio. Additionally, we have identified numerous ways to leverage our deep Delaware Basin experience and incremental scale to improve upon these assets across the board, including approximately $175 million of annual synergies. Permian Resources has a proven integration track record, and we believe the successful execution of these cost savings will create incremental value for both Permian Resources and Earthstone stakeholders.”
— Will Hickey, Co-CEO of Permian Resources
“We are very pleased to announce this transaction with Permian Resources and believe the combination of the two companies’ top-tier assets and history of success will create an even stronger large-cap E&P company which is uniquely positioned to drive profitable growth and development in the world-class Permian Basin. We believe this all-stock transaction provides Earthstone’s shareholders with excellent value for their investment now and in the future. In less than three years, we have grown Earthstone from a small-cap E&P company producing approximately 15,000 Boe per day to one with a production base of over 130,000 Boe per day, delivering significant value enhancement for shareholders along the way. Our success directly reflects our outstanding employees’ dedication, hard work and perseverance. I personally thank each and every one of our employees. I could not be prouder of the Earthstone team and the company we have built together.”
— Robert Anderson, President and Chief Executive Officer of Earthstone
“As significant owners of the business, our primary goal is to drive value for our investors, and the Earthstone transaction is another example of value creation for shareholders. We expect the transaction to be accretive across all key financial metrics before synergies and significantly accretive including synergies, both over the short and long-term. After evaluating over $20 billion of potential transactions during the past twelve months, we firmly believe the acquisition of Earthstone represented the best transaction for Permian Resources. It checks all the boxes, enhancing shareholder value while improving upon an already best-in-class company.”
— James Walter, Co-CEO of Permian Resources
