Civitas Resources enters Permian, DJ basins with $4.7 billion acquisitions
(WO) – Civitas Resources signed two definitive agreements to acquire oil producing assets in the Midland and Delaware basins of west Texas and New Mexico. The agreements were signed with affiliates of Hibernia Energy III, LLC (“Hibernia”) and Tap Rock Resources, LLC (“Tap Rock”), which are respective portfolio companies of funds managed by NGP Energy Capital Management, L.L.C. (“NGP”), for total consideration of approximately $4.7 billion.
According to a company statement, the transactions will fundamentally transform Civitas into a stronger, more balanced, and sustainable enterprise with a deep inventory of high-return drilling opportunities in the heart of the Permian and DJ basins.
Delaware basin entry: Civitas has agreed to purchase a portion of Tap Rock’s Delaware basin assets for $2.45 billion, which includes $1.5 billion in cash and approximately 13.5 million shares of Civitas common stock valued at approximately $950 million. Tap Rock will retain its ownership of the Olympus development area.
The assets include approximately 30,000 net acres, primarily located in Eddy and Lea counties, New Mexico, an area widely considered to be the core of the Delaware basin. First quarter 2023 average production was approximately 59 Mboed, of which 52% was oil. The company will have an inventory of approximately 350 high-quality locations in the Delaware basin.
Midland basin entry: Civitas has also agreed to purchase Hibernia’s Midland basin assets for $2.25 billion in cash, subject to customary purchase price adjustments. The assets include approximately 38,000 net acres in Upton and Reagan counties, Texas – an active and well delineated area in the Midland basin. First quarter 2023 average production was approximately 41 Mboed, of which 56% was oil. The company will have an inventory of approximately 450 high-quality locations on a contiguous acreage position in the Midland basin.
With two producing basins, Civitas will have the ability to flex capital investments and activity levels between assets to maximize returns, ensure desired outcomes, and mitigate potential operational and timing risks.
Permian basin entry with immediate scale. The combined transactions will add approximately 68,000 net acres (90% held-by-production) in the Midland and Delaware basins and will add combined proved reserves of approximately 335 MMBoe, as of year-end 2022. The transactions will increase Civitas’ existing production by 60%, adding approximately 100 Mboed (54% oil) of current production with the acquired assets expected to average approximately 105 Mboed from close through year-end 2023.
Adds premium, low breakeven oil inventory, enhances oil-weighting and margins. Combined, the acquisitions will add about 800 gross locations with approximately two-thirds having an estimated IRR of more than 40% at $70 per bbl WTI and $3.50 per MMBtu Henry Hub NYMEX pricing. The Company’s pro forma oil-weighting is expected to increase to nearly 50%.
Attractively priced, immediately accretive to key financial metrics. The acquisitions are attractively priced at 3.0x 2024 estimated Adjusted EBITDAX (after taking into account the consummation of the transactions), in-line with recent Permian transactions. The transactions are expected to deliver an estimated 35% uplift to 2024 Free Cash Flow per share. Civitas expects to generate approximately $1.1 billion of pro forma Free Cash Flow in 2024 at $70 per Bbl WTI and $3.50 per MMBtu Henry Hub NYMEX pricing.
Increases peer-leading dividend and remains committed to long-term balance sheet strength. Under its existing dividend framework, Civitas expects that its total pro forma dividend will increase by about 20% in 2024. As of the third quarter of 2023, Civitas expects leverage to be approximately 1.1x with a reduction target of less than 1x by year-end 2024. To accelerate debt reduction, the company amended its share buyback authorization to $500 million through year-end 2024 (previously $1 billion through year-end 2024). In addition, the company plans to sell approximately $300 million in non-core assets by mid-2024.
Balanced portfolio maximizes capital allocation flexibility. Post close, Civitas will have a more balanced asset portfolio with basin and commodity diversity. The transactions will provide flexibility in future capital allocation and optimize returns.
“By acquiring attractively priced, scaled assets in the heart of the Permian basin, we advance our strategic pillars through increased free cash flow and enhanced shareholder returns. We will soon have nearly a decade of price-resilient, high-return drilling inventory,” said Chris Doyle, Civitas President & CEO.