US shale consolidation continues as Independence scoops up Contango Oil & Gas

KKR-backed Independence Energy will combine with shale producer Contango Oil & Gas in an all-stock deal and take the newly formed company public under a new name as the North American shale industry continues to consolidate following a rise in oil and gas demand and prices.

The new shale producer will have a market capitalization value of about $4.8 billion, including Contango's current $1.1 billion value, and focus on low-cost shale production in a variety of basins, including the Mid-Continent, Eagle Ford, Permian and Rockies regions, the companies said June 8.

The goal is to bring combined financial might to buying and consolidating distressed upstream oil and gas assets throughout the US shale plays. The company originally will have daily production of 108,000-114,000 boe/d after the deal closes by the fourth quarter of 2021, they said.

Independence shareholders would own about 76% of the merged company and Contango shareholders would have the remaining 24%.

The combined company will be headquartered in Houston and eventually operate under a new name and stock ticker symbol on the New York Stock Exchange, they said.

Private equity-based Independence is managed by KKR's Energy Real Assets team. The new company is being positioned as KKR's primary platform for pursuing upstream oil and natural gas opportunities.

As for Contango, the shale producer was on the verge of bankruptcy until much of its shares were acquired by Fort Worth real estate billionaire John Goff in 2018 and initiated a turnaround with increased funding and a push to grow through buying distressed oil and gas assets in shale plays. After a historical focus on natural gas, Contango shifted more to scooping up crude oil assets primarily in Texas and Oklahoma, including through the acquisitions of White Star Petroleum and, more recently in January, Mid-Con Energy Partners.

Contango's primary strengths are in Oklahoma and the Permian Basin.

Goff will become chairman of the new company, while David Rockecharlie, head of KKR Energy Real Assets, will serve as CEO.

With the industry beginning to emerge from the pandemic and global oil and gas demand rising, the time was ripe for a combination, they said.

"We see tremendous opportunity ahead to create long-term value in the energy sector," Rockecharlie said in a statement. "With today's transaction, we are continuing to execute on the strategy we have been building over the last decade."

The deal makes some sense because scale matters, especially amid a wave of consolidation, and Independence and Contango operated in some of the same basins, so there are clear potential synergies even though both of their asset bases are spread throughout the US, according to S&P Global Platts Analytics.

The new company could reduce its drilling activity in the short term, become leaner, then ramp up once again. The extra financial backing from KKR also could help the new company expand its drilling in other areas where it holds acreage but is less active, such as the Powder River Basin, according to Platts Analytics.

After deal-making was largely halted during the first half of 2020 amid the ongoing coronavirus pandemic, a surge of consolidation picked up once crude oil prices stabilized and investment community pressure continued to focus on capital discipline over increasing barrels.

Not including the Independence-Contango deal, roughly $31.1 billion worth of US shale M&A activity has been seen so far in 2021, according to Platts Analytics. That's compared to $41.1 billion for all of 2020.