June 22, 2023 [Reuters]- Civitas Resources (CIVI.N) on Tuesday said it would acquire oil and gas operations in the Permian basin managed by private equity firm NGP Energy Capital Management for $4.7 billion, expanding its operations into the lucrative shale patch.
The deal is transformative for Civitas, which until now operated solely in Colorado’s Denver-Julesburg (DJ) basin. As well as entering an area considered the heart of the U.S. shale industry, the acquisition will boost the company’s production by 60%, Civitas said in a statement.
Under the terms, Civitas has agreed to purchase a portion of Tap Rock Resources’ assets and all of Hibernia Energy III’s operations. It will pay cash, using a mix of existing reserves and debt, and issue 13.5 million shares to NGP.
“Simply put, these transactions make Civitas a better company, and we see tremendous opportunity to add value in the Permian that will complement our leading oil position in the DJ basin,” Civitas Chief Executive Chris Doyle told analysts.
News of the deal, which Reuters was first to report on Monday, sent Civitas’ shares 6% lower. M&A analysts said the scale of the deal might give investors pause.
“Relative to its market cap, Civitas is undertaking one of the more ambitious deal-driven expansions in the recent market,” said Andrew Dittmar, director at Enverus Intelligence Research.
However, one of its largest shareholders voiced support, citing the benefits of adding high quality inventory and portfolio diversification.
“We have great confidence in this team and look forward to watching them execute on this transformative transaction,” Kimmeridge Managing Partner Ben Dell said in a statement.
The Permian, which stretches across parts of Texas and New Mexico, has seen substantial recent deal activity. Producers have been seeking inventory in a region known for having high productivity, allowing private equity firms, such as NGP, to profitably exit investments there.
Enverus’ Dittmar said Civitas paid a similar price multiple to other recent buyers, although some of those had greater opportunities around undeveloped acreage.
Denver-based Civitas said the cash flow generated by the assets was a significant draw: it would allow its dividend payments in 2024 to be boosted by around 20%.
To help the company repay debt it was using to fund the acquisitions, it would halve its $1 billion share buyback target, initially announced in February and to run to the end of next year.
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