In a mega-deal that more than doubles its reach in West Texas, Noble Energy Inc. on Monday agreed to pay $2.7 billion for Clayton Williams Energy Inc., giving the Houston independent one of the largest positions in the Permian Basin’s Delaware formation.

The super independent, which works on three continents and in the Gulf of Mexico, agreed to trade stock and cash, as well as assume the debt, of Midland, TX-based Clayton Williams. Including existing production and “midstream opportunities,” the deal fetched a premium price estimated at $32,000/acre. Infrastructure buildout would be handled by Noble Midstream Partners LP, which publicly launched last fall.

Noble management has been “very disciplined in assessing expansion opportunities in the Delaware,” CEO Dave Stover said. “This transaction brings all the key elements we value: excellent rock quality, a large contiguous acreage position adjacent to our own, and robust midstream opportunities, reinforcing the Delaware Basin as a long-term value and growth driver for Noble Energy.”

The Permian Basin led all of North America for activity and acquisitions during 2016, and the thirst for leasehold, particularly for Delaware land, has continued into January. Early Tuesday ExxonMobil Corp. agreed to pay an estimated $6.6 billion for Delaware acreage in New Mexico in a deal with the Bass family.

Denver-based PDC Energy Inc. this month agreed to pay Fortuna Resources Holdings LLC $118 million for 4,500 net acres in the Delaware’s Reeves and Culberson counties. Houston American Energy Corp. said it would pay $1.1 million to Founders Oil & Gas III LLC for a 25% working interest in about 800 acres in Reeves County. Last Friday WPX Energy Inc. struck a $775 million transaction to bolt on more Delaware leasehold in a deal estimated to cost about $28,600/acre. Permian-focused Parsley Energy Inc. also agreed to pay $607 million to add 23,000 net acres in the Midland and Delaware sub-basins.

With the Clayton Williams leasehold, Noble, which currently has around 54,000 net acres in the Delaware, would expand in the sub-basin to about 120,000 net acres and 4,200 drilling locations. The leasehold also has an estimated 2 billion boe net of unrisked resource.
“With the 35% increase in drilling locations, we now have an undrilled inventory of nearly 10,000 wells, with an average lateral length of 8,000 feet and approximately 8 billion boe of net unrisked resource in our U.S. onshore portfolio,” Stover said.

“We are rapidly accelerating activity in 2017, starting the year with four rigs operating in the southern Delaware Basin — three on Noble Energy’s acreage and one on the Clayton Williams Energy position,” Stover said. “A second rig is planned to be added to the new acreage in the second quarter, following closing of the transaction, and a third later in the year, in order to exit 2017 with a combined six rigs running in the Delaware Basin.”

With the ramp in activity planned this year, the acquired assets are expected to be “self-funding and accretive” beginning in 2018.

“In addition to the benefits driven by larger scale, the midstream assets and planned buildout provide significant synergies and substantial dropdown potential in association with our ownership in Noble Midstream Partners,” Stover said. Noble initially dedicated 40,000 net acres of its Delaware leasehold to the midstream partnership.

“The plan to build out the new acreage offers “significant synergies,” COO Gary Willingham said during the conference call. Noble Midstream broke ground on the first central gathering facility on existing acreage earlier this month; it is expected to be operational by mid-2017.

“Our approach on the acquired acreage will be consistent with the development” of midstream infrastructure, he said. “Based on the Noble forecasted pace of development, we anticipate an incremental three to five central gathering facilities on the acquired acreage to support our long-term growth objectives. That, along with the associated gathering systems, has been modeled to deliver cash flows equating to an estimated $600 million in midstream value.

“The plans we communicated in November on our existing position are unchanged,” he said. “With the acreage addition, we now expect to end 2017 with six rigs in the Delaware Basin, and we’ll bring on 50 new operated wells this year.”

Noble’s “long track record of operational excellence and value creation, as well as its reputation as a tremendous corporate citizen, make it the ideal partner for us,” said CEO Clayton W. Williams Jr. Last October the CEO was touting the Delaware as the future of the company, which struggled during the two-year downturn. Of note, last November former Noble executive Patrick Cooke took over as COO.

In the transaction, Noble is acquiring land that is directly adjacent to its existing leasehold in West Texas, with 71,000 contiguous net acres in Reeves and Ward counties that have 80% average working interest. In addition, another 100,000 net acres being acquired are spread across “other areas” of the Permian. More than 95% of the leasehold is operated by the seller.

Already identified are 2,400 Delaware gross drilling locations within the Upper and Lower Wolfcamp A, B and C zones using average lateral lengths for future locations of 8,000 feet. Total estimated net unrisked resource potential on the acreage of more than 1 billion boe in the Wolfcamp zones, with upside potential seen in other zones.

The acquired Delaware acreage “is largely undedicated to third-party oil and gas gathering and water systems,” with 12,500 acres dedicated from a third-party operator. Existing midstream Delaware assets include more than 100 miles each of oil, natural gas and produced water gathering pipelines.

In striking the agreement, Noble increased 2017 capital spending and production projections using a “base” and “upside” case. The base plan uses $50/bbl West Texas Intermediate/Brent and $3.00/Mcf Henry Hub natural gas for 2017, with “modest” oil price acceleration through 2020. The upside plan adds $10/bbl crude oil in commodity price to all periods. Each forecast uses a combined 10-13 rigs in the Delaware.

In its base plan, production to 2020 on the acquired assets is seen increasing to 60,000 boe/d from current output of 10,000 boe/d, 70% oil-weighted. Total Delaware net output grows to 145,000 boe/d in the base plan at a 73% compound annual growth rate (CAGR), and increases to 180,000 boe/d in the upside plan, 83% CAGR.

The transaction, scheduled to be completed before the end of June, would boost U.S. onshore oil volume CAGR pro forma in the base plan by 28% and by 34% in the upside plan. In the base and upside cases, the forecast is substantially higher than the company had projected last November, when it said U.S. onshore oil production would grow by 15% to 2020.

Total oil volumes, including U.S. onshore, deepwater and overseas, are forecast to increase by 2020 by a 16% CAGR in the base plan and 21% CAGR in the upside, which is 5% higher than November 2016 projections.

Full company production in 2020 is expected to reach 600,000 boe/d in the base plan and nearly 700,000 boe/d in the upside plan, representing an 11-15% CAGR. Operating cash flow also is projected to increase at a CAGR of 33% in the base plan and 45% in the upside plan, up 7% from November’s forecast.

Noble would have “two core oil basins” in the U.S. onshore with the acquisition,each with 2 billion boe and unrisked resource — in the Denver-Julesburg (DJ) Basin of Colorado and in the Delaware — Stover said. Noble has substantial assets worldwide, with spending this year mostly focused on the DJ, Delaware and in the Eastern Mediterranean’s Leviathan natural gas project offshore Israel.

If the takeover is completed as expected, Noble plans to allocate an incremental $150 million in 2017 capital spending to the Delaware, bringing total spending in the formation to about $500 million. Total capital spending this year, excluding Noble Midstream, now is estimated at $2.1-2.5 billion. Sales volumes for 2017 are forecast to be 410,000-420,000 boe/d. Additional guidance is expected during the 4Q2016 earnings conference call on Feb. 14.

Clayton Williams stockholders are to receive for each share they hold 2.7874 shares of Noble and $34.75. In aggregate, Noble is trading 55 million shares and $665 million in cash. Funds managed by Ares Management LP, which owned 35% of Clayton Williams at the end of 2016, have entered into a support agreement to vote in favor of the transaction. Once the deal is completed, Clayton Williams shareholders would own about 11% of Noble.

Noble plans to fund the cash portion of the transaction with debt. Management also said plans are in place to generate more than $1 billion in asset sales this year, management said.

Petrie Partners Securities LLC was Noble’s financial adviser, while Skadden, Arps, Slate, Meagher & Flom LLP acted as legal adviser. Evercore ISI and Goldman, Sachs & Co. were financial advisers for Clayton Williams, and Latham & Watkins LLP was its legal adviser.