Civitas Resources (NYSE: CIVI ) has announced that it will enter the Permian Basin through “transformational transactions.”
In a statement posted on its website, the company revealed that it has signed two “definitive” agreements to acquire oil-producing assets in the Midland and Delaware basins in west Texas and New Mexico. The agreements were signed with affiliates of Hibernia Energy III LLC and Tap Rock Resources LLC for total consideration of approximately $4.7 billion, subject to customary purchase price adjustments, Civitas noted.
The company said in the statement that the transactions will “fundamentally transform” Civitas into a “stronger, more balanced and sustainable company with a deep inventory of high-yielding drilling opportunities in the heart of the Permian and DJ basins.” Both agreements are subject to customary terms and conditions and are expected to close in the third quarter of 2023, with effective dates of July 1, 2023, Civitas noted.
Under the deal, Civitas has agreed to purchase a portion of Tap Rock’s Delaware Basin assets for $2.45 billion, including $1.5 billion in cash and approximately 13.5 million valued shares of Civitas common stock in $950 million, subject to customary purchase and anti-dilution. price adjustments, the company explained. The assets include approximately 30,000 net acres, located primarily in Eddy and Lea counties, New Mexico, Civitas noted, adding that first quarter 2023 average production was approximately 59,000 barrels of oil equivalent per day.
Civitas has also agreed to buy Hibernia’s Midland Basin assets for $2.25 billion in cash, subject to customary purchase price adjustments, it noted. The assets include approximately 38,000 net acres in Upton and Reagan counties, Texas, and average first quarter 2023 production was approximately 41,000 barrels of oil equivalent per day, it disclosed.
Civitas said in the statement that it plans to finance the two transactions through the incurring of approximately $2.7 billion of senior unsecured debt, approximately 13.5 million shares of Civitas common stock valued at $950 million, approximately $600 million in borrowings under the Company’s undrawn credit facility. and approximately $400 million in cash on hand. Bank of America and JP Morgan are also providing Civitas with $3.5 billion in committed financing for the transaction, Civitas noted.
Transaction Highlights
The combined deals will add about 68,000 net acres in the Midland and Delaware basins and add combined proven reserves of approximately 335 million barrels of oil equivalent by the end of 2022, according to Civitas. They will also increase Civitas’ existing production by 60 percent, the business said.
The acquisitions will add about 800 crude locations with roughly two-thirds at an estimated IRR of more than 40 percent at $70 a barrel WTI and a price of $3.50/MMBtu Henry Hub NYMEX, Civitas said, adding that the acquisitions are attractively priced at 3.0 x 2024. Adjusted EBITDAX est.
Civitas noted that the transactions are expected to provide an estimated 35% increase through 2024 to free cash flow per share. The company added that it expects to generate approximately $1.1 billion of pro forma free cash flow in 2024 at $70/bbl WTI and $3.50/MMBtu Henry Hub NYMEX prices.
After the closing, Civitas said in the statement that it will have a more balanced asset portfolio with basin and commodity diversity. The transactions will provide flexibility in future capital allocation and optimize returns, according to Civitas.
“These credit and transformational transactions will immediately create a stronger, more balanced and sustainable Civitas,” said Chris Doyle, president and CEO of Civitas, in a company statement.
“By acquiring assets at scale at an attractive price in the heart of the Permian Basin, we advance our strategic pillars through increased free cash flow and improved shareholder returns,” he added.
“We will soon have nearly a decade of price-resistant, high-yielding drilling inventory. Our strong capital structure allowed us to capture these transformative assets and, above all, behind the strength of the pro forma business, we have a clear path to reduce leverage and maintain long-term balance sheet strength,” he continued.
Ambitious expansion
Relative to its market capitalization, which stands at just over $5 billion, Civitas is undertaking one of the most ambitious deal-driven expansions in the recent market, research director of Enverus Intelligence, Andrew Dittmar.
“The transaction prices similar to Civitas’ own financial metrics at 3x EBITDA and the remaining inventory of assets means they have a similar life to Civitas’ existing portfolio,” Dittmar said.
“This primarily looks like an additional scale play for Civitas and expands the company’s operations beyond the DJ Basin into the two Permian sub-basins,” he added.
“While Civitas’ remaining DJ drilling locations are economical at current prices, future expansion opportunities at the site appear limited with few private companies left to accumulate. This was likely a key factor why Civitas, PDC Energy, decided to sell Chevron and why Civitas is jumping into the Permian Basin,” he continued.
While the Permian is a prime target for consolidation, assets there aren’t cheap, Dittmar noted.
“Civitas appears to have paid about $7,000 per acre for Tap Rock’s Delaware assets and nearly $17,000 per acre for the Midland assets operated by Hibernia,” he said.
“This compares to previous bids at its base in the DJ Basin that are priced only for production, a trend also seen in plays such as the Eagle Ford. The price is similar to other recent Permian transactions that they have also been generally priced in this range for the acreage and around 3x the EBITDA that Civitas is paying,” he added.
“However, some of these assets were somewhat less developed than Tap Rock and Hibernia, and Civitas may have had to pay slightly more relative to the remaining inventory to secure two of the few remaining large-scale opportunities in the works. Rising core inventory prices have been a key theme of the 2023 M&A market, and with two more listings off the table, it doesn’t look like the trend will reverse anytime soon.” it continued.
Dittmar told Rigzone that with these sales, private equity outflows in the Permian have comfortably topped $10 billion by 2023 “as sponsors flock to the exits amid strong demand for their inventory by of public buyers”.
“EnCap has led the charge with monetizations of more than $8 billion in investments in the pipeline, and now it’s also getting into the NGP itself,” he said.
“With a few exceptions, private equity firms are more likely to look for new investment opportunities outside of the Permian Basin as they have been dissuaded from acquiring assets there,” he added.
“For public companies active in the basin, the next wave of M&A could come from corporate consolidation, as remaining private acquisition opportunities are scarce,” Dittmar said.
To contact the author, please send an email andreas.exarcheas@rigzone.com
