Permian Resources Corp. announced Monday that it plans to acquire The Woodlands-based Earthstone Energy Inc. in an all-stock transaction valued at about $4.5 billion, including net debt.
The companies said the combination would create a $14 billion independent exploration and production company with operations in Texas’ and New Mexico’s Delaware Basin.
Each share of Earthstone common stock would be exchanged at a fixed ratio of 1.446 shares of Permian Resources common stock. The purchase implies $18.64 per share, which represents an 8 percent premium based on 20-day volume-weighted average share prices and a 15 percent premium compared with Earthstone’s closing price on Friday, according to Piper Sandler Research.
Midland-based Permian Resources said the transaction strengthens its position as a top Delaware Basin independent explorer and producer with more than 400,000 Permian net acres and production of around 300,000 barrels of oil equivalent per day. The buyer also said the deal would enhance its free cash flow profile so it could increase returns to shareholders.
The transaction is scheduled to close by year-end after shareholder and regulatory approvals.
The deal is positive longer-term given the combination of increased scale, expected synergies and free cash flow accretion, TPH analyst Oliver Huang wrote in a report.
Kirkland & Ellis counseled Permian Resources with a team led by corporate partners Sean Wheeler, Debbie Yee, Camille Walker and Emily Lichtenheld, capital markets partner Michael Rigdon, executive compensation partner Rob Fowler, debt finance partner Will Bos and tax partners David Wheat and Bill Dong.
Vinson & Elkins advised Earthstone led by partners Doug McWilliams, Lande Spottswood and senior associate Mariam Boxwala with assistance from associates Charlie Fitzpatrick, Chase Browndorf, Michelle Yang, Nick Ashipa and Waleed Vohra. Aiding them were partners Thomas Zentner, John Grand and Sarah Mitchell and senior associates Alex Robertson and Alex Turner.
Team members also included partners Lina Dimachkieh and John Lynch, counsel Allyson Seger and associate Keleigh Carver on tax; partner David D’Alessandro, counsel Regina Ibarra and associates Mary Daniel Morgan and Kenneth Strain on executive compensation/benefits; partner Sean Becker and associates Peter Goetschel and Ashley Plunk on employment/labor; partner Hill Wellford, counsel Evan Miller and associate Rami Rashmawi on antitrust; partner James Longhofer and associate Frank George on finance; and partner Matt Dobbins and associate Ryan Vanderlip on environmental.
John Bell, a onetime V&E associate, is Permian Resources’ general counsel. Bobby Hunt, another V&E alum, is his counterpart at Earthstone.
Jefferies and Morgan Stanley offered financial advice to Permian Resources and RBC Capital Markets and Wells Fargo Securities did so for Earthstone.
The buyer secured a $500 million boost under its credit facility from Wells Fargo Bank, which will increase lender commitments to $2 billion. Permian Resources expects to have liquidity of more than $1 billion at closing.
After completion of the transaction, Permian Resources shareholders will own about 73 percent of the combined company and Earthstone stockholders will hold approximately 27 percent. Permian Resources’ board will be expanded to 11 directors, including the addition of two representatives from Earthstone.
The buyer’s management team will lead the combined company with the headquarters remaining in Midland.
The deal is expected to generate about $175 million of synergies, including $145 million of operational and G&A ones to be fully realized by year-end 2024.
Permian Resources anticipates that annual operational synergies will amount to $115 million and are primarily associated with reduced drilling, completions and facilities, lease operating and midstream costs.
The buyer has identified $30 million of annual general and administrative savings and also is expected to benefit from a lower overall cost of capital, as larger scale and higher production levels accelerate its path to investment grade. This could lead to potential financial synergies of $30 million per year.
Permian Resources plans to increase its quarterly dividend by 20 percent to 6 cents per share beginning in the first quarter 2024.