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Permian Independent Earthstone Snags Midland Assets in Latest Upstream Consolidation
Permian Basin operator Earthstone Energy Inc. is increasing its scale with an agreement to acquire privately held Independence Resources Management LLC (IRM) for about $185.9 million in a cash and stock deal.

The transaction, announced on Friday and expected to close in the first quarter of 2021, consists of an estimated $135.2 million in cash and around 12.7 million in shares valued at $50.8 million. The stock value is based on a closing share price of $3.99 on Dec. 16.
“This transaction is another important step in the execution of our growth strategy to further increase our scale with high-quality accretive acquisitions,” said Earthstone CEO Robert Anderson.
IRM’s asset base and operations include an average production of 8,780 boe/d, weighted to 66% oil, for the third quarter of 2020. A large proved developed producing reserve base “with estimated PV-10 as of Dec. 1 of about $173 million from 16.3 million boe of reserves” is also included in the asset package.
The deal also consists of around 4,900 core net acres that are fully held by production (HBP), 93% operated in Midland and Ector counties. This is made up of an inventory of 70 high-quality undeveloped horizontal locations, as well as inventory targeting the Middle Spraberry, Lower Spraberry and Wolfcamp A zones. Additional potential locations in the Jo Mill, Wolfcamp B and Wolfcamp D zones also are part of the package.
IRM, backed by Warburg Pincus LLC and its affiliates, also has 38,500 net acres that are fully HBP and operated in the eastern Midland Basin.
“This is consistent with our stated strategy to be a consolidator in the Permian Basin and positions us well for additional value-enhancing transactions,” Anderson said.
The Woodlands, TX-based Earthstone expects to maintain “strict financial discipline as we consider future transactions, both as it relates to valuation and to maintaining our balance sheet strength,” according to the CEO.
Upon completion of the transaction, the complementary Midland assets would increase Earthstone’s production by around 50% with minimal impact to leverage. The operator plans to add the 70 gross high-graded drilling locations from IRM’s core acreage that carry a similar return profile to its “highly economic” Midland wells and “will compete with our existing inventory for future development capital.”
With the large majority of IRM’s production coming from its core acreage in Midland and Ector counties, “the acquired assets have a very similar and complementary low operating cost, high margin profile as our existing assets, allowing us to maintain our peer-leading cash margin operating profile,” Anderson said.
Earthstone expects a “minimal need” for incremental general and administrative (G&A) costs and expects to improve cash margins further by targeting a roughly 25% decrease in go-forward cash G&A per unit costs, according to the CEO. “This added scale and quality inventory enhances our development options and free cash flow-generating capacity. We target resuming drilling activity in the first half of 2021 through a one-rig program that we expect to be fully funded well within our operating cash flows.”
The deal has been approved by Earthstone’s board and by the members of IRM. Warburg would have the right to appoint one director to Earthstone’s board. EnCap Investments LP is to maintain the three existing EnCap-affiliated directors. No changes to Earthstone management would occur in connection with the transaction.
Wood Mackenzie last month said consolidation between oil and gas independents is expected to accelerate amid the turn toward an energy transition. Oil and gas investors are gravitating toward stable dividends, which are underpinned by, among other things, solid balance sheets and low capital costs, along with top environmental, social and governance, or ESG, ratings, the firm said.
The Permian, in particular, has been a hot spot for consolidation in the upstream sector. On Monday, Diamondback Energy Inc. announced that it was acquiring QEP Resources Inc. and Guidon Operating LLC in deals valued at around $3 billion. Pioneer Natural Resources Co. in October struck a deal valued at $7.6 billion to join forces with rival Parsley Energy Inc. ConocoPhillips also merged with Concho Resources Inc. in a stock-for-stock deal.
“We may come to look back on the last few months as the beginning of the consolidation that will define the oil and gas sector over the coming decade and beyond,” said Wood Mackenzie Vice President Luke Parker.
RBC Capital Markets LLC and Wells Fargo Securities LLC acted as financial advisors to Earthstone for the transaction. Jefferies LLC acted as financial advisor to IRM. Legal advisors included Jones & Keller PC for Earthstone and Latham & Watkins LLP for IRM.
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