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Cimarex $1.6B Tie-Up with Resolute Builds Permian Delaware Prospects

Denver-based Cimarex Energy Co., whose exploration efforts are concentrated in the Anadarko and Permian basins, agreed Monday to buy cross-town operator Resolute Energy Corp. in a $1.6 billion deal that builds the West Texas portfolio.

Cimarex now has about 62,000 acres in the Delaware sub-basin of West Texas within Reeves County. Resolute, which began working exclusively in the Permian in 2017, has around 21,000 net acres in the county, which would increase Cimarex holdings there by around 34%. Pro forma, Cimarex estimated 3Q2018 production combined would have been more than 253,000 boe/d, including 79,647 b/d of oil.

"This high-quality, bolt-on asset is tailor-made for Cimarex," CEO Thomas E. Jorden said. "It is a perfect fit with our existing Reeves County position and will allow us to leverage our knowledge and deliver superior results over a broader asset base for the benefit of both Cimarex and Resolute shareholders.”

The cash-and-stock transaction would give Resolute $35/share and assume $710 million in debt, putting the total value at about $1.6 billion.

“The Resolute assets are expected to generate free cash flow in 2019, basically funding any additional development capital from the start,” Jorden said. Cimarex expects the combined companies to generate free cash flow in 2020.

“Measured by the relative size, this is not a large deal for Cimarex,” Jorden said during a conference call to discuss the transaction. However, “these assets fit us like a glove...Make no mistake about it, these assets will compete for capital on Day One.”

Cost savings and operational/organizational synergies are expected to be generated with the merger but the “primary motive,” Jorden said. “is about creating value...These assets are self-funding on a go forward basis…"

Resolute management has done a “great job bringing these assets to this point. But quite frankly, they are just smaller and haven't had the breadth and scope that we have to test completion styles to test development styles...We've learned a lot that is going to add value when we exploit these assets,” Jorden said.

"Our dedicated team of talented professionals has worked tirelessly to position this company to be able to capitalize on the tremendous opportunity this merger represents,” Resolute CEO Rick Betz said. “The combination of our assets and people, with the incredibly strong platform that Tom and his team at Cimarex have built, will surely lead to superior results for the shareholders of both companies.”

Under the terms of the definitive agreement, Resolute shareholders would have the right to receive 0.3943 shares of Cimarex common stock, $35/share in cash, or a combination of $14/share in cash and 0.2366 share of common stock. The consideration represents a 14.8% premium to Resolute's closing price of $30.49 on Friday (Nov. 16).

Once completed, Cimarex shareholders would own 94.4% of the combined company, with Resolute owning the rest. The transaction, unanimously approved by each board, is expected to be completed by the end of March, pending customary approvals.

Cimarex plans to fund the deal with cash on hand, secured in part with credit and from the $750 million sale of Ward County, TX, assets earlier this year. The Cimarex executive team and the board are to remain unchanged.

Resolute shareholder Kimmeridge Energy has been a vocal supporter of small operators consolidating in the Permian -- but only at the right price. Kimmeridge Managing Partner Ben Dell said he was encouraged that the Resolute management team had “finally acted and believe consolidation is required in this industry. However, we feel that the proposed purchase price undervalues Resolute.”

A few analysts viewed the deal as a positive.

Jefferies LLC analysts noted that Resolute’s acreage “sits squarely within Cimarex’s Reeves development area, where the company has been testing increasingly tighter spacing in Upper Wolfcamp development projects.” The Resolute acreage has an average working interest of 79% and is 83% held by production, analysts noted.

Resolute uses Plains All American Pipeline LP for Permian oil takeaway, which is similar to Cimarex, “offering helpful integration,” the Jefferies team said.

With a $50,000 value on the oil stream, $18,000 for natural gas liquids and $3,000 for natural gas, the proved developed producing value is estimated at $1.1 billion, equating to an estimated price of $22,000/acre, according to Jefferies.

Analysts with Tudor, Pickering, Holt & Co. (TPH), who valued the deal at around $25,000/acre, said the transaction was “a bit surprising to us, as Cimarex has historically focused on organic leasing to build their acreage footprint as management's compensation is burdened on a full-cycle basis by land cost (making deals historically tough). However, Resolute's acreage sits directly adjacent to Cimarex’s.

The transaction should leave Cimarex's balance sheet “in a healthy position heading into 2019,” TPH analysts said. The multi-year outlook will be hugely important for stock performance as shareholders likely need to see return of capital to enter the conversation post-deal.”

BMO Capital Markets analysts said they see “several positives” in the tie-up. “First, the acquisition bolts on similarly productive acreage to Cimarex's existing Reeves County position. Second, it is accretive by mid-to-high teens” on 2019/2020 earnings metrics. “Third, it is neutral to slightly positive on valuation multiple and net asset value accretion. Fourth, Cimarex maintains its strong balance sheet.”

In its 3Q2018 results issued earlier this month, Cimarex reported production averaged 218,600 boe, with oil output of about 63,909 b/d, which was around 13% higher year/year (y/y).

Net earnings were $148.4 million ($1.56/share), compared with year-ago profits of $91.4 million (96 cents). Operating net cash was $453.5 million, versus $251.0 million a year ago. 

Realized oil prices in 3Q2018 averaged $58.25/bbl, up 31% y/y, with natural gas prices down 31% at $1.84/Mcf. Natural gas liquids prices averaged $25.72/bbl, 19% higher than in 3Q2017.

Cimarex’s realized Permian oil differentials to West Texas Intermediate Cushing averaged minus $14.34/bbl in 3Q2018, versus minus $8.05 a year earlier. The average differential on Permian gas production was minus $1.25/Mcf, compared with minus 29 cents a year earlier. Midcontinent gas prices averaged minus 94 cents/Mcf in 3Q2018 from minus 38 cents in 3Q2017.

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