Denver-Julesburg Basin competitors merge to consolidate rural acreage

Denver — As Colorado regulators continue to mull extending drilling setbacks to 2,000 feet, the longest in the US, a merger by two major producers in the Denver-Julesburg Basin would allow the combined companies to drill longer laterals.

Bonanza Creek Energy plans to merge with a HighPoint Resources -- a former competitor in the DJ Basin in a deal valued at $376 million -- giving the combined company more than 200,000 net, contiguous acres in the oil-rich field.

"This transaction will create a premier DJ Basin player with a peer leading cost structure and a large, attractive rural footprint," said HighPoint CEO Scot Woodall. "The transaction provides HighPoint stakeholders with the opportunity to participate in a larger DJ Basin producer with both an attractive balance sheet and free cash flow profile."

Both operators have experience in developing Colorado's DJ basin and currently produce around 44,000 b/d of crude along with 169 MMcf/d of gross gas, as of August 2020, which is around 12% of the DJ's crude and 7% of the DJ's gross gas total output, according to S&P Global Platts Analytics.

"Approximately 100% of the pro forma acreage will be unincorporated acreage not subject to regulation by municipalities, and only approximately 8% of the acreage will be subject to Federal mineral or surface regulations," the companies reported in a statement.

While regulations surrounding the oil and gas industry are a constant burden on Colorado operators, this merger will create a powerful combination of experienced exploration and production companies. It will be able to drive strong wellhead results with acreage outside of the city limits where the new 2,000-foot drilling regulation could impact well design for operators more exposed to the central core of Weld County.

"BCEI is paying approximately $15,000 per flowing barrel of oil equivalent for the assets with nothing for the acreage, which appears very reasonable," according to a note by KeyBank Capital Markets. "However, BCEI's net debt will increase from $10 million in October to approximately $200 million on a pro forma basis."

The merger is expected to close during the first quarter of 2021. Production in 2021 is expected to average between 45,000 and 50,000 Boe/d. The post-merger company will be able to drill wells with two-mile horizontal lengths due to the contiguous acreage as opposed to the one-mile laterals currently used.

"The assets of these companies fit together like two puzzle pieces," said Dean Tinsley, senior vice president of operations at Bonanza Creek.

Total US merger and acquisition activity in 2020 has now reached $31.1 billion with the fourth quarter still having room to encourage more mergers due to continued weak crude prices.