In the latest of a wave of billion-dollar-plus mergers between oil and gas producers, Denver-based Cimarex Energy Co. announced Monday that it agreed to buy crosstown company Resolute Energy Corp. for $1.6 billion, including debt.
Chris LaFollette, partner in charge of Akin Gump Strauss Hauer & Feld’s Houston office, and counsel Cynthia Mabry led the deal team advising Cimarex along with lawyers in the firm’s New York office.
Other Texas lawyers involved were counsel Chris Centrich, associate Leana Garipova and partners Alison Chen and Jocelyn Tau on tax.
Akin has represented Cimarex on several equity and debt offerings over the past several years, including a $654 million public offering of its common stock in 2015 and a $750 million debt offering the year before.
Arnold & Porter and Wachtell, Lipton, Rosen & Katz are Resolute’s legal advisors. Evercore provided financial advice to Cimarex and Petrie Partners Securities and Goldman Sachs did so for Resolute.
Cimarex’s $35 per share offer is a 14.8 percent premium over Resolute’s closing share price on Friday. Resolute had $710 million in long-term debt as of Sept. 30.
Resolute shareholders will have the right to take up to $35 per share in cash, 0.3943 shares of Cimarex stock or a combination of $14 per share in cash and 0.2366 shares of Cimarex.
The amount of stock and cash is subject to proration at 60 percent stock and 40 percent cash.
Analysts were surprised by the move, with Tudor, Pickering, Holt saying that Cimarex has historically focused on organic leasing to build its acreage as management’s compensation is burdened on a full-cycle basis by land cost, making deals historically tough. However, Resolute’s acreage sits directly adjacent to Cimarex, they noted.
If fully exercised, the cash value of deal would represent a drawdown of around $810 million of Cimarex’s $860 million third quarter cash balance, which would still leave the company’s balance sheet in a healthy position heading into 2019, TPH said.
Seaport Global Securities analysts Mike Kelly and Patrick Sun said Cimarex sat on the M&A sidelines over the last few years, refusing to pay $40,000 per acre for deals in the Permian Basin that were acreage heavy but light on cash flow (versus $22,000 per acre for Resolute’s assets).
“We think the patience was worth it and that the Resolute acquisition is right in Cimarex’s wheelhouse,” they said.
Williams Capital analyst Gabriele Sorbara agreed, saying that the bolt-on to Cimarex’s Reeves County position came at an attractive valuation with significant upside from a top-tier operator taking over.
Cimarex said it expects the acquisition of Resolute – which focuses on the Delaware Basin – will boost its earnings and cash flow per share next year. The deal will expand its footprint in Reeves County by 21,100 acres and add 35,000 barrels of oil equivalent per day, 45 percent of which is oil, to its production.
“This high-quality, bolt-on asset is tailor-made for Cimarex,” the company’s chairman, CEO and president Thomas E. Jorden said in a statement. “It is a perfect fit with our existing Reeves County position and will allow us to leverage our knowledge and deliver superior results over a broader asset base for the benefit of both Cimarex and Resolute shareholders.”
Jorden said the Resolute assets are expected to generate free cash flow next year, which would be able to fund any additional development capital. The company anticipates the combination will generate free cash flow in 2020.
Resolute CEO Rick Betz said the combination “will surely lead” to superior results for the shareholders of both companies.
The deal has to clear Resolute shareholders and regulators and is expected to close in the first quarter. Cimarex stockholders will own around 94.4 percent of the combined company and Resolute shareholders will hold 5.6 percent.
Cimarex said it will fund the cash portion with cash on hand (including proceeds from the sale of its assets in Ward County, Texas, to Callon Petroleum this past May for $570 million) and borrowings under its revolving credit facility.
Resolute has long been considered a takeover target given its high growth, returns and upside to its share price.
It’s had a rocky history. Famed Dallas buyout king Tom Hicks bought Resolute via a special purpose acquisition company from Natural Gas Partners in 2009 for $582 million, a move that took it public.
But the company suffered for many years under a mound of debt and by December 2014 had difficulty selling assets due to sinking oil and gas prices. It ended up having to borrow money from hedge funds at distressed levels and cut the base salaries of its management team, including then-CEO Nicholas Sutton’s from $590,000 to $24,000 per year.
Resolute was able to sell some of its properties later on when prices recovered, including its interests in the Aneth field in southeastern Utah’s Paradox Basin to Australia’s Elk Petroleum last year for $195 million. The sale made the company a pure-play Delaware Basin producer and helped it pay down debt.
But hedge funds came after Resolute earlier this year, including Kimmeridge Energy, Monarch Alernative Capital, VR Capital, Lion Point and Fir Tree Capital, urging a strategic review of alternatives, including a possible sale. This past May the company said it would do just that.
Analysts also have thought that Cimarex could be a consolidation candidate, with some thinking a few years ago that Concho Resources would be a good partner.
Analysts at TPH see more consolidation coming, with the potential for 10 additional transactions next year approaching $35 billion to $40 billion in value.