SM Energy has entered into an agreement to acquire the Uinta Basin oil and gas assets owned by certain entities affiliated with XCL Resources, a private company backed by EnCap Investments and Rice Investment Group, for an unadjusted purchase price of $2.55 billion. Concurrently, Northern Oil and Gas will acquire an undivided twenty percent (20%) of the oil and gas assets of XCL for $510 million, resulting in a $2.04 billion purchase price net to the Company for an undivided 80% interest of the assets. SM Energy intends to serve as the operator of the assets currently operated by XCL. The Company plans to finance the acquisition through a combination of debt and cash on hand.
XCL ASSETS EXPAND SM ENERGY'S TOP-TIER PORTFOLIO ADDING (NET TO THE COMPANY):
- ~37,200 net acres (~99% operated), increasing the Company's core net acreage ~14%
- 43 MBoed/38 MBod (88% crude oil),(1) increasing the Company's 2025E net production to ~195 MBoed and oil mix to greater than 50%
- ~390(2) net locations with breakevens $43 – $57/Bbl,(4) increasing the Company's inventory life by 2 years to 12+ years(5)
- $50.45/Boe 2025E cash production margin,(4) increasing the Company's 2025E cash production margin by ~11%; and
- 107 million Boe preliminary proved reserves,(7) increasing the Company's estimated net proved reserves by ~18%(8)
TRANSACTION BENEFITS
This value-driven acquisition meets SM Energy's strategic objectives:
- Expected to be immediately accretive to key metrics: Acquired for 2.9x NTM Adjusted EBITDAX(6) ($78.00/Bbl and $3.25/MMBtu), the acquisition is expected to be immediately accretive to key financial metrics. Based on 2025E projections, 2025E Adjusted EBITDAX(6) is expected to increase ~35%, 2025E Adjusted free cash flow(6) is expected to increase ~45%, and 2025E cash production margin(6) is expected to increase ~11%.
- Expands the Company's top-tier asset portfolio with accretive scale, significantly increases oil volumes, and extends low-breakeven inventory life: Pro forma 2025E net production is expected to increase to ~195 MBoed, oil production is expected to increase to 52% of commodity mix, reinvestment ratio is expected to decrease by 5%, and inventory is expected to increase by approximately 390(2) net quality locations competitive with current portfolio to add two years of inventory life(5).
- Significant resource upside in Core Uinta driven by the Company's technical expertise: The Uinta Basin has stacked pay potential and high oil content that combine to result in top-tier well performance and inventory with upside. The Company's track record in full stack co-development offers the potential to drive differential value across as many as 17 benches.
- Increasing return of capital while maintaining strong balance sheet: Highly accretive Adjusted free cash flow(6) metrics support a Board of Directors approved 11% increase in the Company's fixed quarterly dividend policy from $0.18 to $0.20 per share, expected to commence in the fourth quarter 2024 while projecting a reduction in post-acquisition leverage from ~1.3x net debt-to-Adjusted EBITDAX(6) to less than 1.0x by mid-2025 (assuming current commodity prices). The Board of Directors has also authorized a new $500 million share repurchase program through 2027, replacing the remaining existing program.
- High margin barrels competitive with Midland Basin due to higher oil content, lower operating costs, and sufficient contracted transportation capacity: SM Energy's 2025E cash production margin(6) is projected to increase approximately 11% as the Uinta Basin cash production margin(6) slightly exceeds the Company's Midland Basin cash production margin(6) due to higher oil content and lower operating costs.
- Continued leader in environmental stewardship: The Company remains committed to environmental stewardship, sustainability, and strong corporate governance and intends to apply its standards to these new operations.
President and Chief Executive Officer Herb Vogel comments: 'Our differentiated technical team has again demonstrated what sets us apart, having identified a unique opportunity to add top-tier assets with significant upside for a reasonable multiple. We believe that this transaction checks the boxes for our acquisition criteria, and we expect to demonstrate value creation through performance optimization, inventory expansion and growth in adjusted free cash flow.'
FINANCING:
SM Energy plans to finance the acquisition through a combination of debt and cash on hand. To assist in financing this all-cash transaction, SM Energy has received firm commitments from J.P. Morgan, Bank of America and Wells Fargo for an aggregate $1.2 billion 364-day unsecured bridge facility.
TIMING AND APPROVALS:
The Company's Board of Directors has approved the XCL Acquisition. Consideration at closing will be subject to customary purchase price adjustments. The effective date of the XCL Acquisition is May 1, 2024, and closing is anticipated to occur in September 2024, subject to customary closing conditions.
ADVISORS:
Kirkland & Ellis LLP is serving as legal counsel to SM Energy. Jefferies LLC is serving as sole financial advisor to XCL. Vinson & Elkins LLP is serving as legal counsel to XCL.
FOOTNOTES:
(1) Q3 2024 estimated.
(2) Locations normalized for 10K foot lateral length.
(3) Based on $78.00/Bbl and $3.25/MMBtu flat pricing.
(4) PV-10 Flat oil breakeven prices with gas valued at 20:1 WTI:HH.
(5) The Company's inventory assessment as of 1/1/2024 plus XCL preliminary estimated inventory for XCL assets as estimated by the Company.
(6) Indicates a non-GAAP measure or metric. Please refer to the "Definition of Non-GAAP Measures and Metrics as Calculated by the Company" section below.
(7) XCL preliminary unaudited estimated net proved reserves are as of May 2024 at $75/Bbl and $2.75/MMBtu flat.
(8) The Company's "Proved Reserves" are estimated net proved reserves as of year-end 2023.
Source: SM Energy
