Setting up to be Colorado’s largest pure-play, Bonanza Creek Energy Inc. and Extraction Oil & Gas Inc. have agreed to merge in an all-stock transaction valued at around $2.6 billion.
The combined exploration and production (E&P) company, to be called Civitas Resources Inc., would operate across roughly 425,000 net acres in the Denver-Julesburg (DJ) Basin.
Civitas would have a production base of 117,000 boe/d, weighted 40% crude oil, on a pro forma 1Q2021 production basis. These operations, according to the company, are geographically diversified across rural, “less regulatory-intensive areas,” as well as more prospective suburban acreage.
“Successful E&P operators will be those who place a priority on disciplined capital deployment, deliver operational and cost excellence, maintain a relentless focus on shareholder value and have governance standards that are aligned with the times,” said Bonanza Creek CEO Eric Greager, who will lead the combined company. “Bonanza Creek and Extraction each bring a demonstrated commitment to these principles, as well as shared organizational and community values.”
Under the terms of the deal, which is expected to close in 3Q2021, Extraction shareholders are to receive a fixed exchange ratio of 1.1711 shares of Bonanza Creek common shares for each share of Extraction common stock owned on the closing date. Upon completion of the merger, Bonanza Creek and Extraction shareholders each would own around 50.0% of Civitas.
The tie-up is expected to generate around $25 million in annual corporate synergies, including general and administrative savings, lease operating expenses efficiencies and reduced capital costs. For example, the combination would eliminate $3-4 million in infrastructure investment required for Bonanza Creek’s development of drilled but uncompleted wells and proved undeveloped reserves. The company also would benefit from improved economics from longer laterals.
With a reinvestment rate of about 50%, production is expected to remain flat to slightly higher in the coming years, with free cash flow (FCF) to support dividends going forward.
“We believe the combination of Bonanza Creek and Extraction will create one of the most durable, profitable and progressive producers in the DJ Basin, with premium assets at the front end of the cost curve,” said Extraction CEO Tom Tyree.
Eye On The Future
One month out of its acquisition of HighPoint Resources Corp., Bonanza indicated that the merger with Extraction would position the company to be the “preferred consolidation partner” for additional transactions in the DJ Basin. This would help increase its trading liquidity and market relevance, “and ultimately to elevate its presence among the top energy producers in the country.”
Civitas plans to expand on the environmental, social and governance (aka ESG) initiatives pursued by Bonanza Creek and Extraction. This includes becoming Colorado’s first net-zero oil and gas producer at closing, through continuing reduction in operational emissions coupled with a multi-year investment in certified emissions offsets.
Civitas also plans to pursue additional sustainability objectives, including the adoption of an electric vehicle (EV) fleet; installation of EV charging stations in its communities and air monitoring and certification through leading organizations such as Project Canary. In addition, the company is seeking to pursue responsibly sourced gas certification for its natural gas production and the development of community solar facilities. It also plans to finance a community fund to sponsor local project grants and scholarships.
“Collectively, we will create significant value for all stakeholders as we will become Colorado’s first net-zero oil and gas producer through the continuing reduction in operational emissions coupled with a multi-year investment in certified emissions offsets,” Tyree said.
Bonanza Creek’s recently announced annual dividend of $1.40/share is expected to be increased by Civitas to $1.60/share effective at closing.
As of April 1, 2021, Bonanza Creek and Extraction had combined cash on hand of $127 million and combined undrawn capacity under their credit facilities of $651 million. The resulting enhanced credit profile is expected to broaden the combined company’s access to the capital markets and reduce its overall cost of capital.
The transaction, which is expected to close in the third quarter of 2021, has been unanimously approved by the boards of directors of both companies, including funds managed by Kimmeridge Energy. Closing is subject to approvals by Bonanza Creek and Extraction shareholders.
Extraction Chairman Ben Dell will also lead the Civitas board. Each company is to nominate four directors to Civitas’ board.
JP Morgan Securities LLC is serving as financial advisor and Vinson & Elkins LLP is serving as legal advisor to Bonanza Creek. Petrie Partners Securities LLC is serving as financial advisor and Kirkland & Ellis LLP is serving as legal advisor to Extraction.
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