Centennial Resource Dev (CDEV) Update - June 28

[dan_s]

CDEV has been on my Watch List for several years. Unless there is a major shift in the Company's strategy, I will be adding it to our Small-Cap Growth Portfolio in my July newsletter. It is being added because of the merger with Colgate Energy Partners III (see details below), which will significantly increase the Company's operating cash flow and "running room" in the Delaware Basin. My initial valuation is $14.50/share.

At the time of this post, CDEV was trading at $6.70.
TipRanks 6-28-2022: "In the last 3 months, 8 ranked analysts set 12-month price targets for CDEV. The average price target among the analysts is $11.13. The 8 price targets range from $8.00 to $14.00."

My forecast/valuation model for CDEV has been posted to the EPG website.
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On May 19th Centennial Resource Development, Inc. (“Centennial” or the “Company”) (NASDAQ: CDEV) and Colgate Energy Partners III, LLC (“Colgate”) announced they have entered into an agreement to combine in a merger of equals transaction. The combined company will be the largest pure-play E&P company in the Delaware Basin with approximately 180,000 net leasehold acres, 40,000 net royalty acres and total current production of approximately 135,000 Boe/d. The combined company plans to leverage its high-quality, scaled asset base to drive leading shareholder returns.

Key Highlights

High-quality, complementary asset base with differentiated inventory depth to support sustainable free cash flow growth

Positioned to significantly increase cash returns to shareholders, with over $1 billion of expected free cash flow in 2023 at current strip prices

Highly accretive to key financial metrics, including cash flow, free cash flow and net asset value per share

Strong balance sheet with expected leverage below 1.0x EBITDA at year-end 2022

Sean Smith to serve as Executive Chair of the Board; Will Hickey and James Walter to serve as Co-CEOs

Significant equity ownership of combined management team aligns with shareholders

Shared commitment to prioritizing ESG with continued focus on reducing environmental impact

Management Commentary

“This transformative combination significantly increases scale and drives accretion across all our key financial and operating metrics. Colgate’s complementary, high-margin assets are a natural fit for Centennial, creating the largest pure-play E&P company in the Delaware Basin,” said Sean Smith, Chief Executive Officer of Centennial. “Importantly, the combined company is expected to provide shareholders with an accelerated capital return program through a fixed dividend coupled with a share repurchase plan. We are excited to partner with Colgate as we share a common vision for the pro forma company that includes a strong balance sheet, a disciplined investment program to drive cash flow and a robust return-of-capital program.”

“The Colgate and Centennial teams have each demonstrated a track record of execution through the years, and we are excited to assume leadership roles in the new company to build upon that success and guide the next phase of value creation. Both companies have established strong financial and operational cultures, and we expect the combined company will be a top-tier, low-cost operator that is able to deliver better margins and shareholder returns,” said Will Hickey, Co-CEO of Colgate.

“The merger of Colgate and Centennial is compelling from a financial, operational and strategic standpoint, establishing a leading Permian Basin independent. We believe the pro forma company is positioned to maximize returns for our new investor base, with our combined management team bringing a track record of operational excellence and strategic value creation. Management’s significant ownership in the combined company should give investors confidence that long-term value creation will always be our top priority,” said James Walter, Co-CEO of Colgate.

Transaction Details

The approximately $7.0 billion merger of equals values Colgate at approximately $3.9 billion and is comprised of 269.3 million shares of Centennial stock, $525 million of cash and the assumption of approximately $1.4 billion of Colgate’s outstanding net debt. Given existing cash balances and interim free cash flow, the company expects its net debt-to-LTM EBITDAX ratio at closing to be approximately 1.0x. The cash consideration and the repayment of Colgate’s outstanding credit facility borrowings at closing are expected to be funded with cash on hand and borrowings under an upsized revolving credit facility.

The transaction has been unanimously approved by the Boards of Directors of both companies and is expected to close in the second half of 2022. The company intends to provide detailed forward-looking guidance for the remainder of 2022 at or shortly after closing of the transaction.

Differentiated E&P Platform

Return of Capital. The scaled cash flow base and balance sheet of the combined company provides clear line of sight to significant near-term shareholder returns.

Combining Best Practices. The combined company intends to integrate leading-edge operational practices from two, highly skilled teams with proven track records. This leveraging of best practices from both organizations positions the combined company for continued success.

Deep Inventory of High-Return Locations. The combined company’s adjacent acreage position, coupled with its high-return inventory supports a highly capital-efficient development plan and provides operational flexibility. Upon closing, the combined company will have over 15-years of drilling inventory, assuming its current drilling pace.

Maximizing Shareholder Alignment. Upon closing, the combined company will have one of the largest management ownership interests of any public E&P company, with the management team owning approximately 12% of the pro forma total shares outstanding. As a result, the company will be highly focused on increasing shareholder value.

Commitment to ESG and Sustainability. As both companies have demonstrated significant reductions in emissions intensity and natural gas flaring to date, ESG excellence will continue to be a core competency of the combined company.

Colgate Overview

Founded in 2015, Colgate has exhibited an exceptional value-creation track record under the leadership of its current Co-CEOs, Will Hickey and James Walter. Colgate has total current production of approximately 70,000 Boe/d and possesses a high-quality acreage position consisting of approximately 105,000 net leasehold acres and 25,000 net royalty acres in the Delaware Basin, with its position concentrated in Reeves and Ward Counties, Texas and Eddy County, New Mexico. The company has grown through a combination of organic development and strategic acquisitions that have increased scale and further enhanced equity returns. The company’s operated acreage position is approximately 90% operated, with a 75% average working interest and an advantaged net revenue interest of 78%, normalized to an 8/8ths basis.

Leadership and Governance

Upon closing, Sean Smith will serve as Executive Chair of the Board of Directors of the newly combined business, and Will Hickey and James Walter will lead the company as Co-CEOs and will serve on the Board of Directors. Matt Garrison, Centennial’s current Chief Operating Officer, and George Glyphis, Centennial’s current Chief Financial Officer, will continue to serve in their respective roles at the combined company. The combined company will be headquartered in Midland, with key positions filled by representatives from both companies. The Denver office will remain open for the foreseeable future to ensure continuity and continued operational success. The combined company will operate under a new name and stock ticker symbol, which are expected to be announced prior to closing.

Following the merger, Centennial’s Board of Directors will be expanded to eleven directors, consisting of Sean Smith, Will Hickey, James Walter, William Quinn (Founder and Managing Partner of Pearl Energy Investments) and Robert Tichio (Partner of Riverstone Holdings LLC), in addition to six independent directors.

“Centennial and Colgate are a clear strategic fit, combining two complementary acreage footprints in the core of the Delaware Basin. We are firm believers in the combined management team and their strategy, and we look forward to creating additional long-term value for stakeholders,” said William Quinn, Founder and Managing Partner of Pearl.

Immediately following the closing, existing Centennial shareholders will own approximately 53% of the combined company, and existing Colgate owners will own approximately 47% of the combined company. Centennial’s largest shareholder, Riverstone, which currently owns approximately 25% of Centennial’s outstanding shares, has executed a Voting and Support Agreement in connection with the transaction. The closing of the merger is subject to customary closing conditions, including approval by Centennial shareholders and regulatory approvals.