Permian Resources to acquire Earthstone Energy in $4.5B all-stock transaction

Permian Resources (PR) and Earthstone Energy (ESTE) announced that they have entered into a definitive agreement under which Permian Resources will acquire Earthstone in an all-stock transaction valued at approximately $4.5 billion, inclusive of Earthstone’s net debt. Under the terms of the transaction, each share of Earthstone common stock will be exchanged for a fixed ratio of 1.446 shares of Permian Resources common stock. The transaction strengthens Permian Resources’ position as a leading Delaware Basin independent E&P with over 400,000 Permian net acres, pro forma production of approximately 300,000 Boe/d and an enhanced free cash flow profile to increase returns to shareholders. The transaction is expected to be accretive to all relevant per share metrics before synergies, including operating cash flow, free cash flow and net asset value per share. The Company expects the transaction to deliver accretion to free cash flow per share of over 30% per year during the next two years and over 25% during the next five and ten-year periods. This is consistent with the Company’s disciplined acquisition strategy, pursuing transactions which provide significant accretion to all relevant per share metrics over both the short and long-term. The accretive nature of this transaction immediately improves Permian Resources’ current return of capital program. The Company plans to increase its quarterly base dividend by 20% to $0.06 per share beginning with its first quarter 2024 dividend. Permian Resources’ variable return program remains unchanged, distributing at least 50% of free cash flow after the base dividend through a variable dividend, share repurchases or a combination of both. Total synergies resulting from the transaction are expected to drive approximately $175 million in annual cash flow improvements, which include $145 million of operational and G&A synergies expected to be fully realized by year-end 2024. Expected annual operational synergies total $115 million and are primarily associated with reduced drilling, completions and facilities, lease operating and midstream costs. Permian Resources expects to realize significant DC&F savings in the Delaware Basin through improved efficiencies and lower cost structure. The Company expects to reduce LOE expense on a per unit basis through personnel and contract services optimization and enhanced production operations. Additionally, the combined company expects to leverage its enhanced size and scale to optimize pricing across completion, production and midstream operations. Permian Resources has identified $30 million of annual general and administrative savings. The combined company is also expected to benefit from a lower overall cost of capital, leading to potential financial synergies of $30 million annually. Permian Resources has proven operational and integration track records and plans to leverage its best practices and lower corporate cost structure to advance cost reductions across all operating expenses and capital expenditures. The all-stock transaction structure allows for shareholders of both Permian Resources and Earthstone to benefit from the cost synergies and significant upside potential of the combined companies. The all-stock transaction will consist of 1.446 shares of Permian Resources common stock for each share of Earthstone common stock, representing an implied value to each Earthstone stockholder of $18.64 per share based on the closing price of Permian Resources common stock on August 18, 2023. Permian Resources will issue approximately 211 million shares of common stock in the transaction. After closing, existing Permian Resources shareholders will own approximately 73% of the combined company and existing Earthstone shareholders will own approximately 27% of the combined company. The transaction has been unanimously approved by the Boards of Directors of both Permian Resources and Earthstone and is expected to close by year-end 2023, subject to customary closing conditions, regulatory approvals and shareholder approvals. Permian Resources’ and Earthstone’s largest shareholders, which currently own approximately 49% and 48% of each respective company’s outstanding shares, have executed a Voting and Support Agreement in connection with the transaction. Upon closing of the transaction, Permian Resources’ Board of Directors will be expanded to consist of eleven directors, including the addition of two representatives from Earthstone. Permian Resources’ executive management team will lead the combined company with the headquarters remaining in Midland, Texas. Permian Resources and Earthstone are operating an eleven-rig drilling program in aggregate, primarily focused on the Delaware Basin. The combined company plans to allocate at least one of Earthstone’s two rigs currently in the Midland Basin to the Delaware Basin. During 2024, the combined company expects to allocate approximately 90% of capital to high rate-of-return projects in the Delaware Basin, predominantly focused on Lea, Eddy, Reeves and Ward Counties. Delaware Basin activity is expected to be weighted slightly more towards New Mexico, as a result of the transaction. The Company expects to maintain optionality from the low decline Midland Basin asset base, while harvesting significant free cash flow. The Company expects to provide detailed forward-looking guidance for the full-year 2024 early next year and in accordance with its annual budgeting cycle. Permian Resources plans to deliver an operational plan that maximizes free cash flow during the near-term, depending on strip commodity prices and expected oilfield service costs. The Company remains committed to returning at least 50% of free cash flow after its base dividend through variable dividends and share repurchases.