If all goes to plan, Civitas Resources Inc. could become a giant among giants in the Colorado oil and natural gas world as it looks to merge another Denver Julesburg (DJ) Basin producer into its operations.


DJ pure-plays Bonanza Creek Energy Inc. and Extraction Oil & Gas Inc. agreed to merge in early May. That came one month after Bonanza completed its takeover of another DJ pure-play, HighPoint Resources Corp. 

The ink is not yet dry on the Bonanza-Extraction tie-up, but it hasn’t stopped executives from making a bid for DJ independent Crestone Peak Resources. With the Crestone deal, estimated at $1.3 billion, Civitas could command more than one-half million net acres in the DJ with an estimated production base of 160,000 boe/d. 

“We are actively building one of the most durable and profitable producers in the DJ Basin,” Bonanza Creek CEO Eric Greager said Monday. “Our combination with Crestone is just one early marker of what we hope to achieve as Civitas, as we establish ourselves as the preferred consolidation partner in the DJ Basin and work toward becoming one of the top energy producers in the nation.”

Marketing Advantages

The plan is to “take advantage of marketing opportunities that improve our realized pricing,” Greager told investors during a conference call. The goal is to “invest in the oily assets because those oilier assets drive margins higher” with their “higher value commodity stream.” Most important, he noted, “as a larger organization, we can manage the cash cost structure” better. “If the focus is on higher value stream products and minimum cash costs, that’s the best way, as far as we can tell, for the most durable way to strengthen cash flow margin.”

Greager said the DJ has not been “particularly competitive from a capital inflow and buyers’ bidding perspective. There’s still a lot of acrimony and angst around the potential for future regulatory changes,” he noted, inferring Biden administration plans to reduce oil and gas drilling on federal leaseholds. 

The DJ consolidation “obviously puts us in a position of strength in terms of the operations,” Greager said. “In terms of the multiples in other basins, there is still some resistance to new capital flowing into the DJ,” which is allowing the consolidation to more easily advance. “There’s not a lot of competitive bidding pressure.”

Creating value, though, is key. “Taking the accumulative synergy value, we’re not going to be slow and sloggy about it. We will be prompt, but we really are interested in creating value for shareholders.”

The sustainability commitment is a big part of the plan, Greager said, as Civitas is looking to become an environmental, social and governance (ESG) leader in Colorado. Civitas plans to become Colorado’s first net-zero oil and gas producer when the Bonanza-Extraction merger is completed, now scheduled by the end of September. The Crestone merger would be completed shortly thereafter.

The goals for Civitas are centered in “creating significant value for all stakeholders and furthering Civitas’ standing as an ESG leader among oil and gas producers in Colorado,” Greager said.

Extraction CEO Tom Tyree said Crestone would provide complementary assets “at the front end of the cost curve, along with common organizational and community values, including an aggressive commitment to sustainability.”
Crestone was formed in 2016 via a joint agreement between the Canada Pension Plan Investment Board (CPP Investments) and The Broe Group. The partners created Crestone with assets acquired from Ovintiv Inc. predecessor Encana Oil & Gas (USA) Inc.

Crestone CEO Tony Buchanon called the “benefits of in-basin consolidation” compelling. He noted that the ESG initiatives also are part of Crestone’s DNA. 

CPP Investments would become the largest shareholder of Civitas when the mergers are completed. Managing director Michael Hill, head of CPP’s Americas Sustainable Energy, also weighed in.

“Over the past five years of our investment in Crestone, the company has demonstrated its commitment to operational strength and efficiency, along with its introduction of innovative sustainability practices,” Hill said. “The combination of Crestone with Civitas creates a stronger platform in the DJ Basin with significant free cash flow and the potential to continue value creation.”

Remaking E&P Model

The execution of a “new” exploration and production (E&P) business model already has been “actively embraced” by Bonanza and Extraction shareholders, Greager noted. Inclusive of the Crestone acquisition, he reiterated that Civitas is set to become Colorado’s first carbon-neutral E&P for Scope 1 and 2 emissions.

For now, Civitas would target “flat to low production growth with moderate cash flow reinvestment,” executives said. Integrating Crestone should result in $45 million of annual synergies, in addition to $25 million associated with the Bonanza/Extraction merger.

Civitas expected to pay an annual dividend of $1.60/share. With Crestone in the mix, the dividend would be increased to $1.85 at closing. The Crestone acquisition is expected to be accretive on “all 2022 estimated key metrics,” including cash flow/share, dividends, inventory quality, credit profile and cost of capital. Estimated free cash flow for 2022 is $575 million-plus.

The Civitas board would increase to nine from eight with Crestone. Bonanza and Extraction would designate four directors each, with CPP Investments designating one person. As previously announced, Greager would be president and CEO. Extraction Chair Ben Dell would chair Civitas.

Under the terms of the all-stock agreement, Crestone shareholders would exchange 100% of their equity interests for 22.5 million shares of Bonanza common stock. Bonanza and Extraction shareholders each would own 37% of Civitas with Crestone shareholders, including CPP Investments, owning 26%. The company would be headquartered in Denver.

The Crestone transaction has been unanimously approved by the boards and approved by Crestone shareholders. CPP Investments and Kimmeridge Energy Management, Extraction’s largest shareholder, each plan to vote in favor of the transaction.