Early this morning before the market open PDC Energy Inc. (PDCE:NASDAQ) and SRC Energy Inc. (SRCI:NYSE.American) announced that they have entered into a definitive merger agreement under which PDC will acquire SRC in an all-stock transaction valued at approximately $1.7 billion, including SRC's net debt of approximately $685 million as of June 30, 2019. Under the terms of the agreement, SRC shareholders will receive a fixed exchange ratio of 0.158 PDC shares for each share of SRC common stock, representing an implied value of $3.99 per share based on the PDC August 23, 2019, closing price.
Upon closing of the transaction, PDC shareholders will own approximately 62% of the combined company with SRC shareholders owning approximately 38% on a fully diluted basis. The transaction has been unanimously approved by each company's board of directors and is expected to close in Q4/19 subject to customary closing conditions and the satisfaction of certain regulatory approvals, including the approval of PDC and SRC shareholders.
The report further advised that upon closing the combined company will be led by PDC's executive management team and will remain headquartered in Denver, Colo. PDCs' board of directors will be expanded to nine directors including two members from SRC's board of directors.
The release states that the transaction is expected to be immediately accretive to key 2020 metrics, including: free cash flow per share, cash return on capital invested, net asset value, general & administrative (G&A) costs per barrel of oil equivalent (boe), lease operation expenses per boe, leverage ratio and inventory life.
The company indicated that the merger materially increases PDC's scale with a consolidated, contiguous Core Wattenberg leasehold position of approximately 182,000 net acres located entirely in Weld County and pro forma Q2/19 total production of nearly 200,000 barrels of oil equivalent (boe) per day (166,000 boe per day in the Wattenberg). On a pro forma basis, the combined company will be the second largest producer in the DJ basin. Coupled with its approximate 36,000 net acre Delaware Basin position, the company will have core assets in two of the premier U.S. onshore basins
PDC also advised that the deal materially enhances free cash flow profile and enhances ability to return additional capital to shareholders. Pro forma free cash flow is estimated to be approximately $800 million from Q3/19 through year-end 2021, assuming $55 per barrel NYMEX. The company has increased and extended its existing share repurchase program from $200 million to $525 million, with a target completion date of year-end 2021.
The firm claims that the deal creates a low-cost mid-cap producer with anticipated peer-leading G&A of approximately $2.00 per boe in 2020 and that the company expects to realize approximately $40 million of G&A savings in 2020 with an additional $10 million of G&A synergies in 2021, after the completion of its integration plan.
President and CEO of PDC Energy Bart Brookman commented, "SRC's complementary, high-quality assets in the Core Wattenberg, coupled with our existing inventory and track record of operational excellence will create a best-in-class operator with the size, scale and financial positioning to thrive in today's market...We remain committed to our core Delaware Basin acreage position and are confident the combined company with its multi-basin focus will be well-positioned to deliver superior shareholder returns. With an even more competitive cost structure, including peer-leading G&A and LOE per Boe, the combined company will have the financial flexibility and sustainable free cash flow to return significant capital to shareholders and capitalize on additional growth opportunities...We look forward to working with SRC to integrate these two companies and achieve our shared objectives."
Lynn A. Peterson, CEO and chairman of SRC Energy added, "I am proud of the SRC team and the high-quality acreage and low-cost operations we have built together. We believe that this transaction will establish the combined company as a leader in the Colorado energy industry. The transaction also provides SRC shareholders with the opportunity to participate in the significant upside potential created by a larger-scale DJ Basin producer with complementary assets in the prolific Delaware Basin".
PDC also advised that in 2020 it plans to invest between $1.2 and $1.4 billion to operate three Wattenberg and two Delaware Basin drilling rigs. The plan is expected to generate approximately $275 million in free cash flow assuming $55 per barrel and $2.70 per Mcf NYMEX oil and gas prices, respectively, with full-year production averaging between 200,000 and 220,000 boe per day.
PDC Energy has a market cap of approximately $1.6 billion and lists its business as a domestic independent exploration and production company that acquires, produces, develops and explores for crude oil, natural gas and NGLs with operations in the Wattenberg Field in Colorado and the Delaware Basin in West Texas. Its operations are focused on the liquid-rich horizontal Niobrara and Codell plays in the Wattenberg Field and the liquid-rich Wolfcamp zones in the Delaware Basin.
SRC Energy has around a $1 billion market cap and identifies its business as a Denver-based oil and natural gas exploration and production company. SRC's core area of operations is in the Greater Wattenberg Field of the Denver-Julesburg Basin of Colorado.
PDCE shares opened higher today at $26.70 (+$1.45, +5.74%) over Friday's close of $25.25 and have traded higher this morning between $26.70 and $30.93/share. At present, the firm's shares are trading at $28.97 (+$3.72, +14.73%).
SRCI shares opened only slightly higher today at $4.22 (+$0.07, +1.69%). Throughout the morning shares have traded higher though, between $4.19 and $4.89/share and currently are trading at $4.57 (+$0.42, +10.12%).[NLINSERT]
1) Stephen Hytha compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Comments and opinions expressed are those of the specific experts and not of Streetwise Reports or its officers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.