Earthstone Energy to acquire Novo Oil & Gas Holdings for $1.5B

Earthstone Energy (ESTE) has entered into an agreement to acquire Novo Oil & Gas Holdings, a privately-held Delaware Basin focused E&P company backed by EnCap Investments, for $1.5 billion. Concurrently, Northern Oil and Gas, Inc. (NOG) will acquire working interests equal to a pro-rata 33 % of the oil and gas assets of Novo for $0.5 billion from Earthstone, resulting in a $1.0 billion purchase price net to Earthstone for the retained 66 2/3 % interest. Consideration at closing will be subject to customary purchase price adjustments. The effective date of the Novo Acquisition is May 1, 2023, and closing is anticipated to occur in the third quarter of 2023, subject to customary closing conditions. The Novo Acquisition is expected to be funded with cash on hand and borrowings under the Company’s senior secured revolving credit facility. In conjunction with the Novo Acquisition, Earthstone has secured $250 million of incremental commitments from existing lenders. This increases elected commitments under Earthstone’s Credit Facility from the current $1.4 billion to $1.65 billion and provides for ~$1.2 billion in undrawn commitments at closing based on $452 million debt outstanding as of March 31, 2023. Earthstone intends to maintain its five operated drilling rigs post-closing. Given that Novo’s inventory immediately competes for capital, Earthstone intends to move one of its two drilling rigs currently operating in the Midland Basin to the Delaware Basin to focus on the Novo assets. The net result will be Earthstone having four rigs operating in the Delaware Basin and one in the Midland Basin post-closing. The Novo Acquisition and revised development plan continue Earthstone’s evolution over the past several years, with its drilling inventory and development program now heavily weighted towards the highly economic northern Delaware Basin assets. Recent Non-Core Asset Sales Earthstone sold certain non-core assets in the Midland Basin for cash proceeds of approximately $56 million on May 31, 2023. The divested assets included production of approximately 530 Boepd and acreage comprising 32 short lateral drilling locations. Earthstone will continue to consider other non-core asset sales as appropriate in the future. Impact on Earthstone The estimated impact on Earthstone from the Novo Acquisition, recent non-core asset sale, and expected capital program is described below. Earthstone intends to provide updated guidance in conjunction with the closing of the Novo Acquisition. Production: 4Q 2023 production expected to increase by 30,000-35,000 Boepd relative to the current operating plan and guidance 2024 total Earthstone production expected to decline moderately compared to 4Q 2023 production, with the production profile flattening out in 2H 2024 Capital Expenditures: No change to the 2023 capital expenditures guidance of $725-775 million Free Cash Flow: Free Cash Flow in 2024 expected to increase by more than 60% given no change to capital expenditures, improved capital efficiency with the Novo drilling inventory and increase in production Drilling Inventory: Delaware Basin acreage position increases by approximately 11,300 net acres to approximately ~56,000 net acres Drilling inventory increases 24% to 1,020 gross locations, with approximately 70% of locations in the Delaware Basin Extends inventory life to approximately 13 years with a five-rig drilling program Debt Metrics and Liquidity: Forecasted leverage at year-end 2023 of 1.1x Last Quarter Annualized Adjusted EBITDAX Moderate increase to near-term leverage counterbalanced by targeted sub-1.0x leverage within 12 months Approvals The Conflicts Committee of the Board of Directors of Earthstone approved and recommended the Novo Acquisition to the Board of Directors of Earthstone, which has approved the Novo Acquisition. No further approvals are required. Revised Commodity Hedge Positions In conjunction with the signing of the Novo Acquisition, Earthstone increased its commodity hedge positions, entering into hedge positions accounting for more than 50% of Novo’s proved developed producing oil and gas reserve volumes through 2024.