Texas lawyers from three different firms had a hand in Denbury Resources’ $1.7 billion purchase of Penn Virginia Corp., the first of what’s expected to be a wave of mergers between publicly traded oil and gas producers.
Vinson & Elkins counseled Plano-based Denbury. Partners Steve Gill and Jeff Floyd led the team with assistance from associates Atma Kabad, Alex Robertson, David Bumgardner, Todd Hartis, Key Hemyari and Madison Guidry.
V&E specialists included partners Lina Dimachkieh on tax, Guy Gribov on finance, David D’Alessandro on executive compensation/benefits, Bryan Loocke on oil and gas, Sean Becker on labor/employment and Larry Nettles on environmental.
Skadden, Arps, Slate, Meagher & Flom and Gibson, Dunn & Crutcher assisted Houston-based Penn Virginia.
Skadden’s team included M&A partner Frank Bayouth and corporate associate Christopher Baeza in Houston.
Gibson Dunn’s team was led by Houston partner Hillary Holmes and included partners Tull Florey, Justin Stolte, Shalla Prichard and James Chenoweth and associates Harrison Tucker, Eric Haitz, Whitney Bosworth, James Robertson and Dave Cias.
Denbury’s general counsel is Jim Matthews, who previously practiced at Vinson & Elkins and ran the Tokyo office. Penn Virginia’s chief legal counsel is Katie Ryan, who previously was an associate at Baker Botts (where Gibson Dunn’s Holmes practiced for almost 14 years).
Penn Virginia shareholders will get a 12.4 shares of Denbury stock and $25.86 in cash for each of their shares worth $79.80, an 18 percent premium over the target’s closing price on Friday. The stock closed at $65.95 per share on Monday.
The target’s stockholders can choose all cash or all stock or a mix, resulting in 191.6 million Denbury shares and $400 million in cash changing hands. The consideration’s overall mix will be 68 percent stock and 32 percent in cash.
Denbury stockholders will own 71 percent of the company and Penn Virginia shareholders will hold 29 percent. Denbury’s board will be expanded from eight to 10 directors and will include two independent members from Penn Virginia’s board.
Raymond James analyst John Freeman said the purchase price for Penn Virginia screens favorably on a per-acre basis compared with Wildhorse Resources, which was thought to be weighing a bid for the company.
The parties expect to close the transaction in the first quarter with Denbury financing the deal with debt and cash on hand.
JPMorgan Chase Bank committed to a new $1.2 billion senior secured bank credit facility, which replaces Denbury’s untapped revolver, and a $400 million senior secured second lien bridge financing.
Denbury said it could use that financing to pay the cash portion of the deal and potentially retire and replace Penn Virginia’s $200 million second term loan and replace Penn Virginia’s bank credit facility, which had $283 million drawn and outstanding as of Sept. 30.
The acquisition adds a position in South Texas’ Eagle Ford Shale to Denbury, which operates mostly in the Gulf Coast and the Rockies.
Denbury CEO Chris Kendall said in a statement that Penn Virginia’s Eagle Ford assets will add many years of high value, low break-even development to the company’s portfolio, complementing its long-lived, high-margin assets.
“The combined company will have a stronger balance sheet enhanced by its growth trajectory and scale,” he said. “We expect the combined company will generate positive free cash flow immediately while growing at a meaningful and sustainable pace.”
John Brooks, CEO of Penn Virginia, which emerged from bankruptcy in 2016, said applying Denbury’s enhanced oil recovery expertise to its large, contiguous Eagle Ford acreage position provides shareholders the opportunity to maximize the assets’ value acceleration.
Penn Virginia effectively put itself on the block three months ago when it announced that it had hired Jefferies to advise it on “strategic alternatives.”
Guggenheim Securities advised Denbury on the deal while J.P. Morgan Securities provided it with financial advice related to the capital structure and financial aspects of the transaction.
The two companies combined had 343 million barrels of oil equivalent of proved oil, natural gas liquids and natural gas reserves as of Dec. 31 and 84,000 barrels of oil equivalent per day of production in the second quarter.
Penn Virginia has about 84,000 net acres in the northeastern portion of the Eagle Ford shale and 560 gross drilling locations.
Raymond James’ Freeman estimates that the undeveloped portion of Penn Virginia’s acreage is being acquired for $8,300 per acre or about $1.25 million per undeveloped location after taking into account mostly oil production on its properties (22,200 barrels of oil equivalent per day).
The analyst said the acquisition provides Denbury – which is typically associated with carbon dioxide-enhanced oil recovery projects – with additional high growth upside, as Penn Virginia expects production this year to jump by 120 percent.