California Resources Corp., or CRC, announced Wednesday that it signed a definitive merger agreement to combine with Bakersfield-based Aera Energy in an all-stock transaction.
The purchase values Aera at about $2.1 billion, including Aera’s net debt and certain other obligations, and is expected to be immediately accretive. At current valuations, the merged company would have an enterprise value of around $5.6 billion, with CRC shareholders owning around 77.1 percent.
Aera is owned by entities managed by German asset management group IKAV (51%) and Canada Pension Plan Investment Board (49%). IKAV and Canada Pension Plan, which operates as CPP Investments, will receive 21.2 million shares of CRC’s common stock equal to about 22.9 percent of CRC’s fully diluted shares.
The transaction is expected to close in the second half of 2024 if it clears regulators and CRC shareholders.
Citi and Jefferies are financial advisors to CRC and Sullivan & Cromwell is outside counsel. Skadden is advising Jefferies including M&A partner Ann Beth Stebbins in New York.
Canada Pension and IKAV used Wells Fargo as financial advisor alongside Truist and Latham & Watkins as legal advisor with a team led by New York partner David Allinson and Houston partner Thom Brandt with New York associate Ransel Potter.
Aera was started as a joint venture of Exxon Mobil and Shell and was sold to IKAV and CPP in 2023 for $4 billion. In that transaction Haynes Boone advised IKAV and Kirkland & Ellis counseled CPP while Exxon and Shell used in-house counsel (Jon Sellars at Shell and Michael Ross at Exxon).
Francisco Leon, CRC’s president and CEO, said in a press release the transaction will create scale in its operations, generate significant free cash flow, accelerate cash returns to shareholders and expand its energy transition platform.
“We remain committed to reducing emissions and this combination will advance our goal to permanently sequester 5 million metric tons per year of CO2 in our underground storage vaults,” he said. “Together, this combination will create an unquestioned leader in energy transition, producing low carbon intensity fuels that California needs while accelerating the decarbonization of the state’s industrial and energy industries.”
The CRC management team will run the combined company, which will be headquartered in Long Beach, Calif. At closing, IKAV and CPP will each nominate one representative to the CRC Board. IKAV and CPP will be subject to lock-up periods.
The deal promises to creates scale and enhances asset durability by adding large, conventional, low decline, oil weighted, proved developed producing reserves and sustainable cash flow, including the ownership of interests in five of the largest oil fields in California with opportunities to increase oil recovery. CRC’s 2024 production is estimated to average 150,000 barrels of oil equivalent per day.
The transaction also aims to unlock significant carbon capture and storage potential as CRC plans to add around 54 million metric tons of CCS pore space in the San Joaquin basin after close.
“It enhances scale across both the upstream and carbon management businesses, with the potential for material synergies,” Mark Viviano, managing partner and lead portfolio manager at Kimmeridge, told Reuters. “CRC is uniquely positioned to capitalize on an energy transition that will require net zero oil production.”
Identified synergies are expected to total $150 million per year and be realized within 15 months of closing, with cumulative synergies over the next decade amounting to nearly $1 billion. Synergies are expected to be realized primarily through lower operating costs, capital efficiencies, G&A reductions and optimization of shared field infrastructure.
After the close of the transaction, CRC plans to allocate its free cash flow to enhance shareholder returns, reduce debt and fund opportunistic expansion of its carbon management business.
The board has authorized a 23 percent increase to CRC’s share repurchase program to $1.35 billion and extended the program’s authorization through year-end 2025. If it clears the board, the company expects to increase its fixed quarterly dividend.
CRC expects to have more than $800 million of liquidity within one year of closing and enhanced access to capital.