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PDC Energy's 'logical' move to acquire SRC Energy meets with approval

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PDC Energy's 'logical' move to acquire SRC Energy meets with approval

PDC Energy Inc.'s planned $1.7 billion all-stock acquisition of SRC Energy Inc. appears to have accomplished the increasingly rare feat of satisfying both industry analysts and shareholders.

The deal, announced before the markets opened Aug. 26, will give PDC approximately 182,000 net acres in Colorado's Wattenberg play and total production of 166,000 barrels of oil equivalent per day in the second quarter. PDC CEO Barton Brookman said the combined company would be one of the largest and most efficient in Colorado.

"This combination immediately expands PDC's operating scale in the Core Wattenberg providing significant synergies and enhancing our ability to generate significant free cash flow. SRC's strong assets, 100% in Weld County, Colorado are a natural fit for existing inventory and complement our track record of operational excellence," he said. "With an even more competitive cost structure, financial flexibility and sustainable free cash flow, we are well positioned to execute on the enhanced opportunities this combination presents for all our stakeholders."

Raymond James largely agreed with Brookman's positive assessment of the deal, emphasizing the impressive holdings the combined company will have in the DJ Basin once the merger closes, likely sometime in the fourth quarter of 2019.

"The transaction creates a large contiguous acreage … and is expected by management to be immediately accretive to 2020 [cash flow per share], [cash return on capital invested] and [net asset value]," analyst John Freeman said. "Assuming commodity pricing of $55/bbl WTI and $2.70 [per MMBtu] Henry Hub, PDCE forecasts being able to deliver over $275M of [free cash flow] in 2020, while growing production ~6%."

Williams Capital Group Senior Equity Analyst Gabriele Sorbara also found the deal to be favorable at first glance.

"We believe this is a logical transaction for PDCE and should be well received by the market for several reasons, including: 1) the equity valuation is at a discount to Friday's close; 2) [the merger] relieves inventory concerns and acquisition risk reflected in shares with the acquisition adding ~86,000 net acres and 60.8 Mboe/d in the DJ Basin transforming PDCE into the second largest DJ Basin producer; and 3) the transaction is expected to be accretive on all key financial metrics," he said in an Aug. 26 note.

Shareholders also provided quick backing to the merger, as shares of PDC jumped more than 16% in midmorning trading Aug. 26 to $29.44 per share after the deal was announced. SRC shares were up more than 10.8% to $4.60 per share.