Permian Resources (PR) to acquire Earthstone (ESTE) - Aug 21

[dan_s]

I sure did not see this coming, but always nice to see two of my favorite companies merging. PR now pays a small dividend. I expect the dividend to increase since the combined company will generate a lot of free cash flow if WTI stays over $80/bbl.
My updated profile on ESTE was posted to the EPG website last night. My updated profile on PR is also under the Sweet 16 tab.

Q4 production should be 132,500 Boepd from ESTE + 178,500 Boepd from PR = 311,000 Boepd. 2024 production estimate is 332,000 Boepd.

This should have a positive impact on Northern Oil & Gas (NOG) that owns 1/3rd of the Delaware Basin assets recently acquired by ESTE.
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Permian Resources to Acquire Earthstone Energy in All-Stock Transaction, Creating a $14 Billion Premier Delaware Basin Independent E&P

Earthstone Energy Inc; Permian Resources Corporation
Mon, August 21, 2023 at 6:05 AM CDT
In this article:

MIDLAND, Texas and THE WOODLANDS, Texas, Aug. 21, 2023 (GLOBE NEWSWIRE) -- Permian Resources Corporation (“Permian Resources” or the “Company”) (NYSE: PR) and Earthstone Energy, Inc. (“Earthstone Energy” or “Earthstone”) (NYSE: ESTE) today 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 transaction, each share of Earthstone common stock will be exchanged for a fixed ratio of 1.446 shares of Permian Resources common stock.

The transaction 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.

Key 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 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 leverage 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

Management Commentary

“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,” said Will Hickey, Co-CEO of Permian Resources. “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.”

“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,” said Robert Anderson, President and Chief Executive Officer of Earthstone. “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.”

“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,” said James Walter, Co-CEO of Permian Resources. “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.”

More details here: https://finance.yahoo.com/news/permian-resources-acquire-earthstone-energy-110500824.html

[dan_s]

From TPH Equity Research: PR Acquires ESTE in All-Stock Transaction
Deal helps drive scale, synergies while up-capping to a premier SMID-cap Permian operator
Sector: Upstream | Ticker: PR | Recommendation: Buy | Target: $13 | Close: $12.89 | Market Cap: $7.2B | Analyst: Oliver Huang

We think the deal is positive longer-term given the combination of increased scale, expected synergies, and FCF accretion. Announcement this morning that PR will be acquiring Earthstone (ESTE – Not Covered) in an all-stock transaction with total transaction value of $4.5B (inclusive of ~$1.8B of net debt). Each share of ESTE common stock will be exchanged for a fixed ratio of 1.446 shares of PR stock, resulting in 211MM shares being issued and an 8% premium based on a 20-day weighted average share price (implied $18.64/shr).

Deal would give PR ~400k net acres (ESTE had ~223k net acres with ~56k coming from the Delaware) and ~300mboepd on a pro-forma basis while being FCF accretive (>30% next 2yr, >25% in 5-10yr timeframe) and generating ~$175MM of synergies (~$145MM via opex / G&A realized by YE’24) and is expected to close by YE’23.

Pro-forma, leverage is expected to sit at <1x at strip with the base dividend increasing 20% starting Q1’24 (+1c/shr to 6c/shr quarterly) while driving potential for higher future returns with the 50% of FCF post-base dividend via the variable / buyback return framework unchanged.

Looking ahead, plans are to run 11 rigs (will move at least 1 of the 2 rigs from the Midland to the Delaware) pro-forma for the transaction with ~90% of capital earmarked for the Delaware while running the Midland asset for FCF; more details to come alongside annual budget for early-2024 with plans to maximize FCF based on strip and service costs. PR will host a call this morning at 7:30CT to discuss the transaction.
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All stock deals are income tax free exchanges. If you own ESTE, your basis will just roll into PR. Plus, you will start getting dividends that should be going up in 2024.

[allen46]

I believe you said that you really liked PR management. It would appear that they have pulled off a great deal. ESTE is my biggest position so I think I will hold and take the PR shares.

[dan_s]

As I have posted here before, in my opinion PR is going to be the next Diamondback Energy (FANG). I believe that the Wall Street Gang is going to love the merger with ESTE. ESTE shareholders should be happy because they will own more shares in a much larger company

If you sell ESTE you will have to pay capital gains taxes. Stock-for-stock mergers are not taxable events.

[aja57]

At the time of the agreement on August 18th ESTE was valued at 18.64 and PR at 12.89 for a ratio of 1.446 . What happens if ESTE starts trading at a higher price relative to PR say a ratio of 1.75 before the deal closes. This would be a 21% premium above the deal. Granted for those in a taxable account, selling exposes you to capital gains taxes but for those that hold shares in an IRA, I would say sell the ESTE for the premium gain before the deal is done and buy PR after the deal is consummated. My question to you ,Dan is if ESTE is at a premium to the 1.446 ratio ,why would ESTE shareholders agree to the deal?

[charlie1]

Approximately three years ago DVN and WPX entered into a merger of equals somewhat similar to ESTE and PR, but not a merger of equals. The key is that both deals are all stock deals. At the time DVN said both company’s stocks were so cheap that everybody wanted to retain the upside. The same rational applies to PR and ESTE. Keep your stock and receive the upside. DVN was trading at $8.82 the day before the deal was announced. On the closing date,January 7,2021, DVNclosed at $18.57. And at year end DVN closed at$ 44.05, the best performer in the S and P. I don’t think the new PR will give us the sameDVN return, but I do think we will be handsomely rewarded holding the new PR.

[ChuckGeb]

The shares of PR for ESTE were fixed at date of agreement. They should trade in lockstep thru the closing date based on that ratio. If you sell ESTE prior to the merger you will now have to pay tax in a capital account on a gain you can avoid by allowing the merger to go thru. the merger of stock for stock is a tax free transaction.

[dan_s]

There is significant upside for PR because larger upstream companies trade at higher multiples.

[aja57]

Thank you all for your comments.

[ChuckGeb]

Everybody loves the deal and the price of both are rising. Lots of primetime Delaware acreage where the majority of the rigs are committed. Just remember a significant amount of the acquisitions made by ESTE over the last 12 months was Midland Basin tier 2 acreage that no one wants to talk about. One rig soon to be none. A lot of capital committed to the step child acreage that will be written off at some point in the future as a “non-cash charge”. The deal is good just not all good.