Permian Resources to buy Earthstone for $4.5 billion, bulking up in northern Delaware Basin

Permian Resources agreed to acquire Earthstone Energy Aug. 21 in an all-stock transaction valued around $4.5 billion including debt, expanding its oil-rich New Mexico Delaware Basin acreage and creating a formidable large Permian Basin operator from two midsized players.

For Permian Resources, the transaction comes with 133,000 b/d of oil equivalent production, 41% oil, and 223,000 net acres in the Permian, the largest US oil basin. That includes 56,000 net acres in the Delaware Basin, which is essentially the western Permian, and 167,000 acres in the Midland Basin, in the eastern Permian.

"Permian Resources has a history of growth and value creation through M&A, and we see this transaction as consistent with prior deals while adding scale in the Delaware to improve capital efficiency," UBS analyst Josh Silverstein said in an investor note Aug. 21 issued after news of the deal was released.

After the transaction closes, which is expected before year-end, the combined Permian Resources will boast over 400,000 total net Permian acres, and pro forma output of 300,000 boe/d.

However, the focus will be on the Delaware Basin, Will Hickey, Co-CEO of Permian Resources, said in webcast remarks during a conference call to explain the deal.

"We plan on allocating roughly 90% of our capital to the Delaware Basin next year," Hickey said, predominantly focused on Lea and Eddy counties in southeast New Mexico and Reeves and Ward counties in West Texas.

Moreover, within the Delaware Basin the allocations will probably be "slightly weighted towards the New Mexico side," Permian Resources Co-CEO James Walter said, adding that 2024 production growth for the combined company is estimated in the single-digits up to 10%.

Will harvest cash from Midland Basin

"This transaction significantly increases our scale in Northern Delaware, and [we] plan to harvest cash from the Midland Basin to reinvest back in the higher rate-of-return parts of our business," Walter said.

Hickey noted that all Earthstone's Delaware Basin assets are in areas where Permian Resources is already operating.

"They provide significant remaining undeveloped fairways in the same benches we are drilling today, but they also come with a significant upside that we haven't seen in other recent opportunities," he said. "By leveraging our scale, efficient operational practices, organizational low-cost focus and balance sheet strength, we expect to achieve $175 million in annual operational and financial synergies."

"We are currently drilling and completing wells that directly offset Earthstone's position with significantly faster cycle times and lower overall spread rates, which together lead to over $1 million per well in savings," he added. "For example, our high-spec rig contracts are at lower prices than Earthstone's lower-quality rigs, and we are averaging several days faster per well."

In total, Permian Resources and Earthstone are currently running 11 rigs, mostly in the Delaware Basin. While two rigs are currently allocated to the Midland Basin, in 2024 the plan is to run just one rig in the Midland.

Permian Resources and Earthstone Energy have both grown steadily by acquisitions of smaller entities in the past handful of years.

Permian Resources, which began in 2016 as Centennial Resource Development founded by former EOG Resources CEO Mark Papa, is coming up on the one-year anniversary of its acquisition of Colgate Energy which transformed it into its current size and provided the Permian Resources name.

Meanwhile, Earthstone in mid-August closed on its $1 billion net acquisition of the Northern Delaware Basin assets of Novo Oil & Gas Holdings. Before that it had acquired Chisholm Energy Holdings for $604 million in February 2022 and the New Mexico Delaware Basin of Titus Oil & Gas Production II for $627 million in August 2022.

Large growth in just 3 years

In less than three years Earthstone grew from a small-cap E&P producing about 15,000 boe/d to one with a production base currently about nine times that level, Robert Anderson, president and CEO of Earthstone, noted in a statement.

Walter said his team has not seen many opportunities in the past few years with inventory that competed with what Permian Resources already had. But he said Earthstone's high-quality inventory made it an attractive acquisition target.

"It really was the first opportunity of scale we have evaluated [in the past year] that checks all of our boxes," he said.

Under the transaction terms, each share of Earthstone common stock will be exchanged for 1.446 shares of Permian Resources common stock. That implies an Earthstone value of $18.64/share, representing a 15% premium to its Aug. 18 closing price of $16.23.

Walter said the deal is "highly accretive" across all metrics, both short- and long-term, including cash flow/share, free cash flow/share and net asset value.

Both companies' boards have already approved the deal.