Denver-based Civitas Resources Inc. is expanding into the Permian Basin through a pair of debt, stock and cash-funded acquisitions valued at roughly $4.7 billion combined, management said Tuesday.
Civitas, heretofore the largest Denver-Julesburg (DJ) Basin pure-play natural gas and oil producer, signed the deals with private equity-backed Hibernia Energy III LLC and Tap Rock Resources LLC. Both are portfolio companies of funds managed by NGP Energy Capital Management LLC.
The West Texas and southeastern New Mexico assets include acreage in both the Midland and Delaware sub-basins.
“These accretive and transformative transactions will immediately create a stronger, more balanced and sustainable Civitas,” said CEO Chris Doyle. “By acquiring attractively priced, scaled assets in the heart of the Permian Basin, we advance our strategic pillars through increased free cash flow and enhanced shareholder returns.” He added, “We will soon have nearly a decade of price-resilient, high-return drilling inventory. Our strong capital structure allowed us to capture these transformational assets, and, importantly, behind the strength of the pro forma business, we have a clear path to reduce leverage and maintain long-term balance sheet strength.”
The combined transactions, which Civitas expects to close during the third quarter, would add about 68,000 net acres (90% held by production) and combined proved reserves of about 335 million boe, the company said. The assets are currently producing some 100,000 boe/d (54% oil), and are expected to increase Civitas’ existing production by roughly 60%.
Following the acquisitions, Civitas is targeting production of 200,000-220,000 boe/d (70-73% liquids) in 2023 and 270,000-290,000 boe/d (71-74% liquids) in 2024.
“With two producing basins, Civitas will have the ability to flex capital investments and activity levels between assets to maximize returns, ensure desired outcomes, and mitigate potential operational and timing risks,” management said.
In the Delaware sub-basin, Civitas is purchasing a portion of Tap Rock’s assets for $2.45 billion including $1.5 billion in cash and roughly 13.5 million Civitas shares valued at $950 million. The assets span about 30,000 net acres, mostly located in New Mexico’s Eddy and Lea counties. First quarter production averaged 59,000 boe/d (52% oil), and the assets contain approximately 350 “high-quality locations,” Civitas said.
The Hibernia assets in the Midland sub-basin would be acquired for $2.25 billion in cash. They include roughly 38,000 net acres in Upton and Reagan counties, TX, which Civitas called a “well delineated area in the Midland Basin.” First quarter production from the Hibernia assets averaged about 41,000 boe/d (56% oil).
The Hibernia assets would add roughly 450 high-quality assets on a contiguous acreage position to Civitas’ portfolio, management said.
Civitas plans to fund the two transactions through the incurrence of $2.7 billion of unsecured debt, 13.5 million shares of Civitas common stock valued at $950 million, $600 million in borrowings under the company’s undrawn debt facility, and about $400 million of cash on hand.
Permian Assets ‘Don’t Come Cheap’
Civitas was created in 2021 through the consolidation of four DJ pure-plays.
Relative to its market capitalization, which sits at just over $5 billion, “Civitas is undertaking one of the more ambitious deal-driven expansions in the recent market with nearly $4 billion in acquisitions,” said Andrew Dittmar, a director at Enverus Intelligence Research. “While Civitas’ remaining DJ drilling locations are economic at current prices, future expansion opportunities in the play look limited with few remaining private companies to roll up.
“That was likely a key factor in why Civitas peer PDC Energy Inc. decided to sell to Chevron and why Civitas is jumping into the Permian Basin.”
Dittmar added, “While the Permian is a prime target for consolidation, assets there don’t come cheap. Civitas appears to have paid around $7,000 per acre for the Delaware assets of Tap Rock and nearly $17,000 per acre for the Midland assets operated by Hibernia.”
Private investment firm Kimmeridge, which says it is the third largest shareholder of Civitas, endorsed the deal.
“These accretive Permian assets will add high quality inventory and portfolio diversification, while empowering Civitas to continue leading the pack in delivering shareholder returns,” said Kimmeridge managing partner Ben Dell. “We have great confidence in this team and look forward to watching them execute on this transformative transaction.”
Dittmar noted that, “With these sales, private equity exits in the Permian have comfortably topped $10 billion in 2023 as sponsors stampede for the exits amid strong demand for their inventory from public buyers.”
EnCap Investments LP “has led the charge with monetizations of over $8 billion in investments in the play, and now peer NGP is getting into the act as well,” Dittmar said. “With a few exceptions, private equity firms are more likely to be looking outside the Permian Basin for new investment opportunities as they have been priced out of acquiring assets there.”
Moody’s Investors Service, for its part, upgraded its credit rating outlook for Civitas to “positive” from “stable,” following announcement of the acquisitions.
“The change in Civitas’ outlook to positive reflects the benefits from significantly increased scale and diversification expected from the acquisitions of assets in the Permian Basin, while maintaining supportive credit metrics,” said Jonathan Teitel, a Moody’s senior analyst.
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