California Resources (CRC) has signed an agreement to merge with Aera Energy, a US-based natural gas, oil exploration and production company, in an all-stock deal that values the latter at around $2.1bn.

The value of the deal is inclusive of Aera Energy’s net debt and some other obligations.

Founded in 1997, the company is based in Bakersfield, California and has additional operations in Ventura, Monterey, and Fresno counties.

As per the terms of the deal, Aera Energy’s owners will be issued 21.2 million shares of the New York Stock Exchange (NYSE)-listed California Resources. This equates to nearly 22.9% of the fully diluted shares of California Resources, which operates as an energy and carbon management company.

The current owners of Aera Energy are entities managed by asset management group IKAV (51%) and Canada Pension Plan Investment Board (CPP Investments) (49%).

At current valuations, the pro forma entity formed via the merger would hold an enterprise value of approximately $5.6bn. Shareholders of California Resources will own nearly 77.1% of the combined company.

IKAV chairman Constantin von Wasserschleben said: “The combination of CRC and Aera has strong industrial logic and aligns with our philosophy to make investments that effect positive change in the world.

“The merger brings together the strengths of both companies, who will be better together to operate what will be the largest oil and gas company in California by production.”

According to California Resources, the deal adds significant, conventional, low-decline reserves weighted towards oil along with sustainable cash flow.

Aera Energy recorded an average Q3 2023 production of roughly 76,000 barrels of oil equivalent per day (Boe/d), predominantly oil, and estimated proved reserves of about 262 million Boe by the end of 2024.

On a pro forma basis, California Resources is estimated to achieve production of about 150 thousand Boe/d for the year 2024, with oil comprising 76%, and proved reserves estimated at around 680 million Boe, predominantly proved developed.

The combined entity will hold stakes in five major California oil fields, offering avenues for enhanced oil recovery.

California Resources president and CEO Francisco Leon said: “This strategic transaction will create scale in our operations, generate significant free cash flow, accelerate cash returns to shareholders and expand our energy transition platform.

“We remain committed to reducing emissions and this combination will advance our goal to permanently sequester five million metric tons per year of CO2 in our underground storage vaults.”

The completion of the transaction is contingent upon meeting standard closing conditions, obtaining regulatory approvals, and securing approval from California Resources’s shareholders. The transaction is anticipated to finalise in the latter half of this year.

California Resources has enlisted Citi and Jefferies as financial advisers, with legal counsel provided by Sullivan & Cromwell. Meanwhile, Wells Fargo, alongside Truist, acted as lead financial adviser for CPP Investments and IKAV, with legal advisery services offered by Latham & Watkins.