Acquiring privately held Midland Basin assets for cash and stock


Earthstone Energy announces bolt-on acquisition. (Credit: ptra from Pixabay)

Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone”, the “Company”, “we”, “our” or “us”) today announced that it has entered into definitive agreements to acquire privately held operated assets located in the Midland Basin (the “Bolt-On Acquisition”) from two sellers unaffiliated with Earthstone.  The aggregate purchase price of the Bolt-On Acquisition is approximately $73.2 million consisting of $49.2 million in cash, subject to customary purchase price adjustments, and approximately 2.6 million shares of Earthstone’s Class A common stock valued at $24.0 million based on a closing share price of $9.20 on September 30, 2021. The Bolt-On Acquisition is expected to close by the middle of the fourth quarter of 2021 with an effective date of July 1, 2021.

Highlights of the acquired asset base and operations include:

  • Average daily production of 4,400 Boepd (26% oil, 52% liquids) during September 2021
  • Projected next twelve months Adjusted EBITDAX of approximately $42 million
  • $116.0 million PDP PV-10 as of 7/1/21 with associated reserves of approximately 13.3 MMBoe (11% oil, 31% NGL, 58% natural gas) based on NYMEX strip pricing as of September 30, 2021
  • Low operating cost, high margin asset base with operating synergies when added to Earthstone’s existing assets

Expected impact on Earthstone includes:

  • Purchase price of ~1.7x estimated next twelve months Adjusted EBITDAX based on NYMEX strip pricing as of September 30, 2021
  • Bolt-On Acquisition expected to be accretive on all key financial metrics
  • Earthstone maintains target of achieving sub-1.25x leverage at year-end 2021
  • Approximate 4,000 Boepd (17% oil, 47% liquids) impact on production from date of close (expected by the middle of the fourth quarter) through end of 2021

Management Comments

Mr. Robert J. Anderson, President and CEO of Earthstone, commented, “This transaction will be our fourth acquisition this year as we continue to advance our consolidation strategy and enhance our Midland Basin footprint with additional scale.  The acquisition of these low operating cost, high margin, producing assets at an attractive valuation is a nice addition to our production and cash flow base. The Bolt-On Acquisition also includes approximately ~10,000 net acres (100% operated; 67% held by production) in Irion County. We expect to benefit from additional operating synergies when production operations are combined with other assets in the area. As we have done in prior acquisitions, we look forward to applying our operating approach to these assets in order to reduce costs and maximize production and cash flows.

“The mix of consideration between cash and equity in accordance with our focus on maintaining a strong balance sheet positions us well to continue our consolidation efforts.  We are pleased to continue to add incremental scale in an accretive manner without sacrificing our balance sheet or free cash flow generation.”

Acquisition Consideration and Sources

The consideration for the transaction consists of 2,611,111 shares of Earthstone’s Class A common stock, which represents approximately 3.0% of the total outstanding Class A and Class B common stock on a pro forma basis, and approximately $49.2 million of cash, subject to customary purchase price adjustments from the July 1, 2021 effective date to closing.  Earthstone intends to fund the cash portion of the consideration and fees and expenses with cash on hand and borrowings under its revolving credit facility, which currently has a borrowing base of $650 million.  As of August 31, 2021, and adjusting for the current borrowing base of $650 million, Earthstone had liquidity of approximately $365 million based on the $363.4 million of undrawn borrowing base capacity and $1.2 million in cash.

Source: Company Press Release