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Centennial scoops up Colgate for $3.9B

May 19, 2022 Claire Poole

Publicly traded Centennial Resource Development Inc. and private equity-backed Colgate Energy Partners III announced plans Thursday to combine in a merger-of-equals that values Colgate at $3.9 billion, creating a $7 billion pure-play in the Delaware Basin within the Permian Basin of West Texas and southern New Mexico.

The deal involves Centennial issuing 269.3 million shares (about 94 percent of Centennial’s shares outstanding) and paying $525 million in cash to Colgate. Centennial will also take on Colgate’s $1.4 billion in debt.

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 parties expect it to close in the second half of the year. Existing Centennial shareholders will own about 53 percent of the combined company and Colgate owners will hold around 47 percent.

Centennial used Citi as financial advisor, including Claudio Sauer and Michael Shelly, and Latham & Watkins as legal advisor.

The Latham team was led by Houston corporate partners John Greer and Ryan Maierson with associates Thomas Verity, Bryan Ryan, Jordan Mack, Brent Wagner, Ziyad Barghouthy and Zek Zhang.

Advice was provided on tax matters by Houston partner Jim Cole with associates Michael Rowe and Marianne Standley; on antitrust matters by Washington, D.C., partner Mike Egge, with associate Mary Casale; and on benefits and compensation matters by Washington, D.C., partner Matthew Conway and counsel Laura Szarmach, with Chicago associate Victoria Wolfe.

Counsel on environmental matters was handled by Washington, D.C., partner James Barrett with associate Andy Landolfi; on finance matters by Houston partner Catherine Ozdogan; and on oil and gas-related matters by Houston partners Robin Fredrickson and Jeff Munoz with associate Robert Cunningham.

Colgate tapped Credit Suisse Securities (Tim Perry and Jens Becker) and Jefferies (Guy Oliphint) as financial advisors and Kirkland & Ellis as legal advisor.

The Kirkland team was led by corporate partners Sean Wheeler, Debbie Yee, Emily Lichtenheld and Cephas Sekhar. The team also includes real assets partners Anthony Speier and Chad Smith and associate Will Eiland, tax partners David Wheat and Joe Tobias, environmental transactions partner Jonathan Kidwell and debt finance partner Rachael Lichman.

Colgate, which is based in Midland and was founded by Will Hickey and James Walter with backing from Pearl Energy Investments and NGP, has been on an acquisition tear, picking up properties from NGP-backed Luxe and Occidental Petroleum. It was planning to go public, according to various reports.

The combined company will hold 180,000 net leasehold acres and 40,000 net royalty acres and produce around 135,000 barrels of oil per day.

Centennial’s CEO Sean Smith will assume the role of executive chairman and Colgate’s co-CEO’s Hickey and Walter will keep their roles at the combined company.

Smith called the deal “transformative” in a press release, saying the combination significantly increases scale and drives accretion across all of Centennial’s 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,” he said. “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.”

Following the merger, Centennial’s board of directors will be expanded to eleven directors, consisting of Smith, Hickey and Walter as well as William Quinn, founder and managing partner of Pearl, and Robert Tichio, partner of Riverstone Holdings (which owns 25 percent of Centennial), in addition to six independent directors.

The deal is expected to increase cash returns to shareholders, with more than $1 billion of expected free cash flow in 2023 at current strip prices.

Claire Poole

Claire Poole is a senior writer at The Texas Lawbook, where she covers corporate transactions.

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