Lower 48 explorer Denbury Resources Inc. has scuttled plans to take over Penn Virginia Corp., blaming “difficult market conditions” and opposition by some shareholders.
The Plano, TX-based independent, which specializes in carbon dioxide (CO2) enhanced oil recovery (EOR), last fall agreed to buy Penn Virginia for $1.7 billion and debt, a cash-and-stock transaction designed to build a substantial foothold in the Eagle Ford Shale.
However, as of Thursday, when the termination was announced, the transaction’s value had fallen to under $741 million. Denbury shares have plummeted by more than half, slicing about $1 billion of its market value.
“While we firmly believed in the strategic merits of the combination with Penn Virginia, the difficult market conditions since announcement, combined with the opposition of certain Penn Virginia shareholders, led us to the conclusion that the transaction was unlikely to receive the necessary supermajority approval from Penn Virginia shareholders,” Denbury CEO Chris Kendall said.
At midday Friday, Denbury was trading at around $1.90/share, down more than 2.5%. Penn Virginia’s share price was down by almost the same percentage at about $52.96. The decision to tear up the agreement was said to be mutual.
“We remain optimistic about the significant resource potential that CO2 enhanced oil recovery could deliver in the Eagle Ford, and the work we have completed to date has only increased that optimism,” Kendall said.
Penn Virginia CEO John A. Brooks said the board had “decided that it is in the best interests of the company and our shareholders to mutually agree to terminate our merger agreement with Denbury.
“Given the caliber and dedication of our team, the high quality of our assets and the strength of our balance sheet, we believe we are well positioned to continue to execute our previously announced two-rig development plan, which is expected to be fully funded from cash flow.”
Although Penn Virginia had sought strategic alternative ahead of the Denbury tie-up, Brooks said the company would “remain focused on developing our assets and maximizing value for our shareholders as a standalone company.”
Denbury, meanwhile, plans to pursue “practical opportunities” to expand its business, “particularly in areas where our EOR expertise, experience and extensive CO2 resources can create value for the benefit of all Denbury stakeholders,” Kendall said.
In the longer term, Denbury management expects CO2 EOR to “become an even more vital component of the world’s oil supply, with the smallest possible carbon footprint for an oil producer, and that Denbury is uniquely positioned in the industry to benefit from an increasing need to limit or reduce CO2 emissions.”
Denbury remains committed to executing its previous strategic plan, said the CEO, including an ongoing EOR development at the Cedar Creek Anticline, a project underway in Montana.
In addition, Denbury still expects to generate “well over $100 million of free cash flow in 2019 at current oil prices,” giving the company “significant flexibility going forward,” Kendall said.
Under the terms of the merger/termination agreements, neither Denbury nor Houston-based Penn Virginia face any payments for canceling the merger.