Highly Accretive Transaction in Delaware Basin Meaningfully Increases Scale
Earthstone Energy has entered into an agreement to acquire Novo Oil & Gas Holdings, a privately-held Delaware Basin focused E&P company backed by EnCap Investments, for $1.5 billion. Concurrently, Northern Oil and Gas, Inc. will acquire working interests equal to a pro-rata 33 1/3% of the oil and gas assets of Novo for $0.5 billion from Earthstone, resulting in a $1.0 billion purchase price net to Earthstone for the retained 66 2/3% interest (the 'Novo Acquisition'). Consideration at closing will be subject to customary purchase price adjustments. The effective date of the Novo Acquisition is May 1, 2023, and closing is anticipated to occur in the third quarter of 2023, subject to customary closing conditions.
The Novo Acquisition is expected to be funded with cash on hand and borrowings under the Company’s senior secured revolving credit facility. In conjunction with the Novo Acquisition, Earthstone has secured $250 million of incremental commitments from existing lenders. This increases elected commitments under Earthstone’s Credit Facility from the current $1.4 billion to $1.65 billion and provides for ~$1.2 billion in undrawn commitments at closing based on $452 million debt outstanding as of March 31, 2023.
Robert J. Anderson, President and CEO of Earthstone, commented, 'Over the past few years, we strategically positioned the Company as a significant operator in the Permian Basin. In 2022, we materially advanced our consolidation strategy, closing three accretive acquisitions totaling ~$2.0 billion, including two significant northern Delaware Basin asset acquisitions. I am pleased that we are continuing to further our consolidation strategy with today’s announcement of the Novo Acquisition as we further build our northern Delaware Basin asset base. With significant production volumes from the Novo Acquisition, we expect Earthstone’s near-term production levels to surpass 135,000 barrels of oil equivalent per day (“Boepd”). Further, we anticipate Free Cash Flow to increase significantly compared to standalone Earthstone as we have added substantial producing assets but are not increasing capital expenditures. The addition of approximately 200 high-quality, low breakeven locations deepens our drilling inventory and with our flat rig count, extends our inventory life significantly to over a decade. We believe the benefits of continued consolidation are very compelling, and we strongly believe this is a value-creating transaction for Earthstone. We are also pleased that Northern recognized the value of these assets and chose to participate in this highly accretive transaction.'
Novo Asset Highlights (Net to Earthstone)
- Recent production of approximately 38,000 Boepd (37% oil, 66% liquids) from 114 wells
- $912 million Proved Developed (“PD”) PV-10 and PD reserves of approximately 73.9 million barrels of oil equivalent (“MMBoe”)(1)
- 21 gross operated wells waiting on completion
- Estimated $360-380 million of next twelve months (“NTM”) Adjusted EBITDAX(2)(3)
- Approximately 11,300 net acres (99% operated, 57% working interest, 86% held by production) in the core of the Delaware Basin in Eddy County, New Mexico, and Culberson County, Texas
- High-return drilling inventory with ~200 gross operated locations and with average breakeven below $40 barrel of oil (“Bbl”)(4)
Novo Acquisition Highlights
- Attractive Financial Accretion: Purchase price implies 2.7x NTM Adjusted EBITDAX and approximately a 30% NTM unlevered Free Cash Flow yield. The transaction is accretive to Earthstone across key financial metrics, providing an estimated increase to 2024E Adjusted EBITDAX of more than 20% and an estimated increase to 2024E Free Cash Flow of more than 60%(3)(5).
- Enhanced Scale & Synergy: Highly complementary acreage and regional expertise supports greater capital and operational efficiency, plus increased and sustainable Free Cash Flow generation.
- Adds High-Quality Inventory: Strengthens deep inventory with ~200 high-return locations, with average breakeven below $40/Bbl and de-risked gross locations across multiple benches that will immediately receive an allocation of capital. Extends inventory life to approximately 13 years.
- Creates a Stronger Earthstone: Transaction significantly strengthens operational and financial performance, better positions Earthstone as a Permian consolidator, and accelerates potential for meaningful shareholder returns.
Earthstone intends to maintain its five operated drilling rigs post-closing. Given that Novo’s inventory immediately competes for capital, Earthstone intends to move one of its two drilling rigs currently operating in the Midland Basin to the Delaware Basin to focus on the Novo assets. The net result will be Earthstone having four rigs operating in the Delaware Basin and one in the Midland Basin post-closing. The Novo Acquisition and revised development plan continue Earthstone’s evolution over the past several years, with its drilling inventory and development program now heavily weighted towards the highly economic northern Delaware Basin assets.
Recent Non-Core Asset Sales
Earthstone sold certain non-core assets in the Midland Basin for cash proceeds of approximately $56 million on May 31, 2023. The divested assets included production of approximately 530 Boepd (~45% oil) and acreage comprising 32 short lateral drilling locations. Earthstone will continue to consider other non-core asset sales as appropriate in the future.
Impact on Earthstone
The estimated impact on Earthstone from the Novo Acquisition, recent non-core asset sale, and expected capital program is described below. Earthstone intends to provide updated guidance in conjunction with the closing of the Novo Acquisition.
Production:
- 4Q 2023 production expected to increase by 30,000-35,000 Boepd (37% oil) relative to the current operating plan and guidance (2023 guidance of 96,000-104,000 Boepd)
- 2024 total Earthstone production expected to decline moderately compared to 4Q 2023 production, with the production profile flattening out in 2H 2024
Capital Expenditures:
- No change to the 2023 capital expenditures guidance of $725-775 million
Free Cash Flow:
- Free Cash Flow in 2024 expected to increase by more than 60% given no change to capital expenditures, improved capital efficiency with the Novo drilling inventory and increase in production(3)
Drilling Inventory:
- Delaware Basin acreage position increases by approximately 11,300 net acres to approximately ~56,000 net acres
- Drilling inventory increases 24% to 1,020 gross locations, with approximately 70% of locations in the Delaware Basin
- Extends inventory life to approximately 13 years with a five-rig drilling program
Debt Metrics and Liquidity:
- Forecasted leverage at year-end 2023 of 1.1x Last Quarter Annualized (“LQA”) Adjusted EBITDAX(2)
- Moderate increase to near-term leverage counterbalanced by targeted sub-1.0x leverage within 12 months(5)
Approvals
The Conflicts Committee of the Board of Directors of Earthstone approved and recommended the Novo Acquisition to the Board of Directors of Earthstone, which has approved the Novo Acquisition. No further approvals are required.
Revised Commodity Hedge Positions
In conjunction with the signing of the Novo Acquisition, Earthstone increased its commodity hedge positions, entering into hedge positions accounting for more than 50% of Novo’s proved developed producing oil and gas reserve volumes through 2024.
Investor Presentation and Other Details
Please refer to the “Investors” section of Earthstone’s website, www.earthstoneenergy.com, for access to a presentation highlighting the Novo Acquisition.
Further details of the terms of the Novo Acquisition are set forth in the Agreement, which will be filed by Earthstone with the Securities and Exchange Commission (“SEC”) and will be available for viewing under its profile at www.sec.gov or under the “Investors” section of Earthstone’s website.
Advisors
Truist Securities, Inc. acted as the exclusive financial advisor to Earthstone. Raymond James & Associates, Inc. served as financial advisor for and provided a fairness opinion to Earthstone’s Conflicts Committee. RBC Richardson Barr acted as the exclusive financial advisor to Novo. Legal advisors included Kirkland & Ellis LLP for Earthstone, Richards, Layton & Finger, P.A. for Earthstone’s Conflicts Committee, and Vinson & Elkins LLP for EnCap and Novo.
Click here for Novo Acquisition Presentation (June 15 2023)
Source: Earthstone Energy
