Denver-based SM Energy Co. announced Thursday that it agreed to acquire the Uinta Basin oil and gas assets owned by entities affiliated with XCL Resources for $2.55 billion in cash. XCL is a Houston company funded by EnCap Investments and Rice Investment Group.
At the same time, Minnesota-based Northern Oil and Gas Inc. (NOG) will acquire a 20 percent stake in the oil and gas assets for $510 million, resulting in a net $2.04 billion purchase price for SM Energy. The company intends to be the operator of the assets.
SM Energy plans to finance the acquisition through a combination of debt and cash on hand. It has received firm commitments from J.P. Morgan, Bank of America and Wells Fargo for a $1.2 billion 364-day unsecured bridge facility.
Reuters reported in March that EnCap sought to sell XCL, two years after the private equity firm’s plan to combine the oil and gas producer with a local rival — EP Energy — was blocked by U.S. antitrust regulators. Sources told the news agency that XCL could be worth at least $2.8 billion, including debt.
TPH&Co. analyst Oliver Huang said the transaction adds scale to SM Energy through its first-time entry into Uinta Basin, located in northeast Utah. The deal also represents NOG’s expansion into the area, said Mark Lear, an analyst at Piper Sandler, who noted deal accretion is partially offset by increased leverage and he sees no immediate increase to shareholder return.
Kirkland & Ellis is legal counsel for SM Energy and NOG. Jefferies is XCL’s financial advisor and Vinson & Elkins is its legal counsel.
The Kirkland team was led by corporate partners David Castro Jr., William Eiland and Lindsey Jaquillard and associates Matt Gibson, Mitch Holliman, Lyle Paul and Jake Johnson, supported by corporate associates Skyler Sikes and Clayton Hart.
The group also included tax partners Mark Dundon and Jacob Walley and associate Brooke Schafer; antitrust partners Chuck Boyars and Matt Wheatley; environmental transactions partner Jonathan Kidwell and associate Courtney Tibbetts; and debt finance partners Will Bos and Chad Davis and capital markets partners Matt Pacey and Anthony Sanderson.
The V&E team was led by partner Bryan Loocke, senior associate Michael Zarcaro and associates Vestita Zumot and Kelly McGee, with assistance from counsel Megan Menniti and associates Rob Vezina and Destiny Alliniece.
Other key members included partners Todd Way and Megan James, senior associate Dan Henderson, associate Ryan Dolmanet, Adam Bateman, Patrick Darby and Katie Dillard (tax); partners Mike Marek, Jackson O’Maley, Matt Strock and Dave Wicklund, senior associate David Lassetter and associate Drew Clements (corporate); partner Hill Wellford and counsel Evan Miller (antitrust); partner Sarah Mitchell (Insurance); and partner David D’Alessandro (benefits).
SM Energy president and CEO Herb Vogel said in a statement that its team has identified a unique opportunity to add top-tier assets with significant upside for a reasonable multiple.
“We believe that this transaction checks the boxes for our acquisition criteria, and we expect to demonstrate value creation through performance optimization, inventory expansion and growth in adjusted free cash flow,” he said.
The deal covers about 37,200 net acres, increasing SM Energy’s core net acreage by 14 percent. The company expects the deal to be immediately accretive to key metrics next year, including EBITDAX by 35 percent, free cash flow by 45 percent and cash production margin – revenues minus operating expenses – by 11 percent.
In addition, SM Energy said the purchase expands its asset portfolio with accretive scale, significantly increases oil volumes and extends low-breakeven inventory life; increases return of capital while maintaining a strong balance sheet; and adds high margin barrels competitive with Midland Basin due to higher oil content, lower operating costs and sufficient contracted transportation capacity.
The company said it remains committed to environmental stewardship, sustainability and strong corporate governance and intends to apply its standards to the new operations.