Consolidation continued in the weakening oil and gas sector, with Denver-based PDC Energy Inc. announcing Monday that it was buying SRC Energy Inc. in a stock transaction valued at $1.7 billion, making it the second largest oil and gas producer in the Denver-Julesburg Basin.
Houston lawyers at Akin Gump Strauss Hauer & Feld counseled SRC, including the office’s partner-in-charge Chris LaFollette, counsel Cynthia Mabry and Chase Armbrust and associates Matt Turner and Lisa Garrett.
Attorneys in the firm’s New York office also worked on the deal. Wachtell, Lipton, Rosen & Katz represented PDC (with a team led by partner Igor Kirman in New York).
The financial advisors included J.P. Morgan for PDC (Andrew Castaldo) and Citi and Goldman Sachs & Co. for SRC (Chris Miller, Michael Shelly and Serge Tismen from Citi and Michael Klym and Kevin Adam from GS). Latham & Watkins advised Citi, including Houston partner David Miller.
Under the terms of the transaction, SRC shareholders will receive 0.158 of a PDC share for each of their shares valued at $3.99 per share. The offer represents a 3.9% discount over SRC’s stock close on Friday but a 6.8% premium over its average value over the last 30 days.
PDC also will assume SRC’s net debt, which amounted to around $685 million as of June 30.
The discount is a little misleading, Raymond James analyst John Freeman noted, because SRC has outperformed the exploration and production group by 20% since PDC merger rumors first surfaced on August 6.
PDC shareholders will own around 62% of the combined company and SRC stockholders will hold 38%. The parties expect to close the deal in the fourth quarter if it clears regulators and both companies’ shareholders.
PDC’s board will expand by two seats to nine members, including two from SRC, with a three-member group on synergistic planning set up after the close.
Investors have been pushing PDC to create more value for shareholders, including returning more cash, and the deal is expected to help do that by increasing its scale and improving its free cash profile.
PDC estimates around $800 million in pro forma free cash flow between this quarter and the end of 2021 assuming $55 per barrel crude prices.
PDC said it’s increased its existing stock buyback program to $525 million from $200 million, with $400 million remaining on authorization, and extended it to the end of 2021.
It’s a logical transaction for PDC that should be well received by the market, according to Williams Capital analyst Gabriele Sorbara, who noted the discount equity valuation; the addition of 86,000 net acres and production of 60,800 barrels of oil per day; and the expected accretion to 2020 cash flow per share, cash return on capital invested and net asset value.
Sorbara said the valuation works out to $5.42 per barrel of oil equivalent of proved reserves and $27,242 per flowing barrel of oil equivalent per day of production, which are roughly in line with PDC’s currently implied metrics.
The combined company will have 182,000 net acres in Weld County, Colorado, with production of 166,000 barrels of oil equivalent per day, or 200,000 barrels adding in PDC’s 36,000 net acres in the Delaware basin.
PDC expects the deal’s primary accretion will come from general and administrative cost savings of $40 million in 2020 and $50 million per year starting in 2021.
PDC CEO and president Bart Brookman said in a statement that SRC’s complementary, high-quality assets in the core of the area along with PDC’s existing inventory will create a “best-in-class operator” with the size, scale and financial positioning to thrive in the market.
“With an even more competitive cost structure … the combined company will have the financial flexibility and sustainable free cash flow to return significant capital to shareholders and capitalize on additional growth opportunities,” he said.
SRC chairman and CEO Lynn A. Peterson said he believes the transaction will establish the combined company as a leader in the Colorado energy industry and provide SRC shareholders with the opportunity to participate in the upside potential of a larger-scale DJ Basin producer.
PDC has been selling off its infrastructure assets recently, including its water midstream assets in the Delaware Basin to WaterBridge Resources for $125 million and its gas-related infrastructure assets in the Delaware Basin to EagleClaw Midstream for $182 million.
Back in 2017, SRC boosted its position in the area by acquiring 30,200 net acres from Noble Energy for $608 million.