PDC Energy Inc. said Monday it would acquire Colorado pure-play SRC Energy Inc. in an all-stock deal valued at $1.7 billion that would create the Denver-Julesburg (DJ) Basin’s second largest oil and gas producer. 

The merger would boost PDC’s footprint in the Wattenberg field to 182,000 net acres and increase production by about  60,800 boe/d. If the deal closes as expected in the fourth quarter, overall production would be about 200,000 boe/d, making PDC the second largest operator in Colorado behind Occidental Petroleum Corp. following its Anadarko Petroleum Corp. mega-merger, which closed earlier this month.

In a nod to a deal designed to create a lean operator as the equity markets expect more from the upstream sector, PDC CEO Bart Brookman said SRC’s assets are complementary to those of his company’s. SRC CEO Lynn Peterson added that the tie-up is likely to create a leader in the state’s energy industry.

“The consolidated footprint will enable an efficient, clearly-communicated long-term development plan with a focus on minimizing surface usage through capital efficient long laterals and continued emphasis on eliminating trucking, as over 95% of anticipated oil production will be transported via pipeline,” PDC management said.

All of the acreage being acquired is located in northeast Colorado’s Weld County, which has long contributed the bulk of PDC’s volumes. Brookman added, however, that the company remains committed to its 36,000 net acre position in West Texas, where it’s been focused on developing a position acquired in 2016 in the Permian Basin.

The acquisition carries with it $685 million of SRC’s net debt. PDC expects $40 million of general and administrative savings in 2020, with another $10 million expected in 2021. Pro forma free cash flow (FCF) is estimated to be $800 million from 3Q2019 through year-end 2021, assuming $55/barrel oil.

PDC has already authorized an increase in its share buyback program to $525 million from $200 million with a target completion date of year-end 2021. The company said it expects to fund that with the additional FCF created by the deal.

The company plans to spend between $1.2-1.4 billion to operate three Wattenberg rigs, similar to current levels, and two rigs in the Permian Delaware sub-basin. That’s compared to the company’s current budget of $810-840 million. Next year’s production is expected to be in the range of 200,000-220,000 boe/d.

When the deal closes, two members of SRC’s board are expected to be named as directors at PDC. The company would remain headquartered in Denver and be managed by PDC’s executive team.

Under the agreement, SRC stockholders would receive 0.158 PDC shares for each share of SRC common stock, representing a value of $3.99/share based on PDC’s Aug. 23 closing price. SRC stock gained 12% on Monday after the deal was announced and had been trending higher since rumors of the acquisition emerged earlier this month. PDC shares were also up by more than 17% on Monday.

The deal comes as investors demand an overhaul to exploration and production (E&P) companies operations across the country, particularly in natural gas-rich basins as the commodity has remained stubbornly low for years and investors expect better returns. PDC only recently fought off a challenge from activist investor Kimmeridge Energy Management Co. LLC, which claimed the company was underperforming.

“This deal looks to be right down the fairway for the consolidation needed among small-to-mid cap E&Ps to help push towards strengthened financial metrics and restore investor confidence in a very challenging market,” said Enverus analyst Andrew Dittmar. “It is a low to no premium deal that is less about getting shareholders paid immediately via the transaction and more about building a larger, more efficient developer.”