In a $240 million deal, Alabama-based Diversified Energy Co. Plc has acquired Midcontinent assets from ConocoPhillips.
The acquisition includes nearly 1,500 producing wells in Oklahoma and Texas as Diversified strengthens its central regional focus area.
“I am pleased to announce another strategically-aligned acquisition at a compelling valuation in the Company’s Central Region that reinforces our commitment to create long-term value for shareholders. Financed entirely with existing liquidity, this non-dilutive acquisition represents a compelling opportunity to further scale our Central Region portfolio while maintaining a strong balance sheet,” said Diversified CEO Rusty Hutson Jr.
“Building on our success in Appalachia, we are excited to increase our holdings within the central region that position us to drive greater synergies and unlock additional shareholder value through scale.”
The acquisition, which includes an interest in ~1,500 producing wells located in Oklahoma and Texas represents Diversified’s sixth major acquisition within the Central Region since May of 2021 and the second acquisition in the Mid-Continent area since mid-2021.
The proximity of the Assets to previously acquired Tapstone assets creates further potential to develop operational synergies of scale in the Central Region and benefits from a constructive regulatory environment.
The company will operate ~60% of the Acquisition’s net production of ~9 MBoepd (52 MMcfepd; ~90% natural gas and NGLs), which represents a 6% increase to Diversified’s 1Q22 exit rate (136 MBoepd; 816 MMcfepd).
Central Region Acquisition Highlights
- Purchase price of $240 million before customary purchase price adjustments
- Estimated net price of ~$210 million (“Acquisition Cost”) with a late September closing (“the Closing”)
- Fully financed from existing liquidity
- Cash margins(a) of ~70% on estimated Adjusted EBITDA of $82 million(b)
- Uplift of ~20% to Diversified’s 2021 Hedged Adjusted EBITDA per share(c)
- Acquisition Cost represents a ~2.5x purchase multiple(d) and PV17 of PDP reserves
- Pro-forma Net Debt / Adjusted EBITDA of 2.2x(e) with ~95% of debt in fully amortizing notes
- Consolidated corporate declines unchanged at ~8.5%(f)
- Net production(g) increase of ~9 MBoepd (~52 MMcfepd; 60% operated), (+6% vs 1Q22 exit rate)
- Upside available through field level synergies, Smarter Asset Management acreage swaps, non-operated development opportunities
Diversified is acquiring the Assets unhedged and, upon closing, will evaluate its consolidated hedged levels consistent with its commitment to protect cash flows that underpin its consistent dividend and debt repayment. The Company expects to close the transaction in late September 2022, following customary due diligence. Closing is subject to customary conditions being met, including title an environmental review.
Diversified will finance the Assets with cash on hand and existing availability on its Revolving Credit Facility resulting in a pro-forma Net Debt / Adjusted EBITDA of 2.2x(e) (1Q22: 2.2x). After funding the Acquisition, approximately 95% of the Company’s borrowings will exist in fixed-rate, fully amortizing and predominantly investment grade rated notes that benefit from hedge-protected cash flows.
The Company’s post-acquisition funding liquidity approximates $250 million(h) before any increase in the Company’s RCF borrowing base for the additional collateral from the Acquisition. Accordingly, the Company expects liquidity to rise with its next borrowing base redetermination scheduled in the fall of 2022.
By financing this Acquisition without new equity and only with existing liquidity, at the current price strip the Company estimates the Acquisition adds ~20% to Diversified’s previously reported 2021 Hedged Adjusted EBITDA per share (2021: $0.43/shr). Combined with the Company’s previously reported acquisition of East Texas Assets in April, the Company increased per share accretion by ~30% vs. 2021 Hedged Adjusted EBITDA per share.
With an effective date of 1 June 2022, the Acquisition adds ~31 MMBoe (186 Bcfe) of net PDP reserves, with a PV10 of ~$297 million, using NYMEX strip pricing as of 25 July 2022. Accordingly, the Purchase Price represents an estimated PDP valuation of PV17. The Assets complement Diversified’s existing portfolio, contributing an estimated Adjusted EBITDA of $82 million(b) underpinned by high cash operating margins of ~70%(a) and a modest annual decline of ~8%(f) that continues to shallow. Including the Acquisition, Diversified’s consolidated corporate decline rate remains industry-leading at approximately 8.5%(f).
Expanding Presence and Scale in the Central Region
The Assets provide high cash operating margins through realised pricing that benefits from low regional commodity differentials and a largely variable expense structure that is consistent with the Company’s other Central Region assets.
- Total Lease Operating Expense of $1.90-$2.00/Mcfe ($11.40-$12.00/boe)(i)
- Natural Gas pricing differentials of $(0.20)-$(0.30)/MMBtu
- Production-weighted average well age of 16 years
Consistent with the Company’s asset acquisition strategy, Diversified intends to retain certain ConocoPhillips Company experienced personnel who will complement Diversified’s asset stewardship operating philosophy designed to improve well performance, enhance margins, and lower emissions.