EIR Analyst Looks at $2.6B XCL Deal

After sitting out the tsunami of upstream consolidation over the last few years, SM Energy has made its move by partnering with Northern Oil & Gas to acquire Uinta producer XCL Resources.

That’s what Andrew Dittmar, Principal Analyst at Enverus Intelligence Research (EIR), said in a statement sent to Rigzone by the Enverus team, adding that XCL Resources is ranked 47th on Enverus’ “top private operators list.”

“Non-operated specialist Northern will take an undivided 20 percent stake in the asset and help defray the cost of the acquisition for SM, a strategy also deployed by Vital Energy and Earthstone Energy to acquire larger assets while keeping debt on the balance sheet in check,” Dittmar said in the statement.

“Most companies have sought acquisitions in basins where they currently operate because of the security that comes with already being familiar with the play and, critically, the ability to capture operational synergies from combining lands,” he added.

“It has been more unusual to see an E&P in this market enter a new basin, making SM a bit of an outlier. However, with the Permian increasingly consolidated and prices high it makes sense SM would look elsewhere to find additional inventory,” he continued.

In the statement, Dittmar said the Eagle Ford is more fragmented than the Permian but added that high-quality inventory is largely held by big public companies and said SM could get access to a bigger runway of lower breakeven inventory by looking to the Uinta.

“One other feature relatively unique to the Uinta may have made it an attractive target for SM is the scrutiny of deals the FTC has applied to in-basin consolidation,” Dittmar noted.

“Concerns about having the deal blocked by regulators may have lessened interest from incumbent players like Ovintiv and made the asset more attractive to new entrants,” he added.

“While the strategic rationale for a pivot into the Uinta is sound, SM may have a bit of work to do explaining the acquisition to investors more familiar with the Permian and Eagle Ford. That plus the use of cash for M&A versus shareholder returns and the increased leverage could be driving the initial negative reaction from Wall Street,” he continued.

Dittmar said in the statement that “a key driver of the deal, like most other transactions seen over the last few years, is adding inventory, particularly at the low end of the cost curve.” He highlighted that Unita locations have some of the highest oil recoveries per lateral foot in the Lower 48, “surpassed only by the Delaware Basin.”

“That makes much of the inventory economic to drill at $50/WTI or less despite the relatively high discount applied to oil production there compared to WTI pricing,” Dittmar stated.

“Among the private companies in the play, XCL had access to the highest quality inventory in the Uinta,” he added.

Dittmar noted in the statement that companies are likely to continue expanding their scope in the hunt for deals beyond the Permian Basin and look at other lesser-known areas, “potentially including the emerging Utica liquids window, as the search for inventory at reasonable prices continues.”

“That comes while private equity groups, which have been overwhelmingly sellers, step up their own pursuit of underappreciated assets to refill portfolios,” he said.

“Combined, those forces should drive a robust market for assets and see valuations rise outside the Permian, although not fully to Permian levels,” Dittmar went on to state.

In a release posted on its website last week, SM announced that it had entered into an agreement to acquire the Uinta Basin oil and gas assets owned by certain entities affiliated with XCL Resources LLC for an unadjusted purchase price of $2.55 billion.

“Concurrently, Northern Oil and Gas, Inc. will acquire an undivided twenty percent of the oil and gas assets of XCL for $510 million, resulting in a $2.04 billion purchase price net to the company for an undivided 80 percent interest of the assets,” SM revealed in the release.

“SM Energy intends to serve as the operator of the assets currently operated by XCL. The company plans to finance the acquisition through a combination of debt and cash on hand,” it added.

In the release, SM President and Chief Executive Officer Herb Vogel said, “our differentiated technical team has again demonstrated what sets us apart, having identified a unique opportunity to add top-tier assets with significant upside for a reasonable multiple”.

“We believe that this transaction checks the boxes for our acquisition criteria, and we expect to demonstrate value creation through performance optimization, inventory expansion and growth in adjusted free cash flow,” he added.

In a separate release posted on its website, Northern Oil & Gas Chief Executive Officer Nick O’Grady said, “NOG continues to further define itself as the preeminent national, non-operated franchise, with low leverage, growing cash returns, diversified by both region and commodity mix”.

“The XCL acquisition is consistent with our strategy of investing in the highest quality assets, with significant upside and long-dated inventory, developed and run by leading operators … The Uinta Basin has emerged as one of the best and fastest growing oil resources in the United States, and SM has a track record as one of our best and most responsible operators,” he added.

“We look forward to working with them for many years to come. We believe this transaction will be the most accretive in our history, benefiting per share net profit and free cash flow both immediately and over time,” he continued.

NOG President Adam Dirlam said in that release, “with XCL, we are acquiring a multi-stacked pay acreage position with significant long-term upside”.

“These assets are exemplary of our returns-focused strategy: delivering immediately while offering significant exploration potential further enhancing NOG’s optionality,” he added.

“Much like our prior joint development transactions, we have devised an aligned, conservative development and governance plan with a proven E&P company. We continue to be the partner of choice for our operators as the largest, best capitalized and most reliable working interest owner in the United States,” he continued.

The release on SM’s site states that closing is anticipated to occur in September 2024, subject to customary closing conditions. Northern Oil & Gas noted on its site that it expects to close the transaction “in late Q3 or early Q4 2024”.

SM describes itself as an independent exploration and production company with a long-standing, principled approach to doing business ethically and responsibly. Northern Oil & Gas describes itself as “a real asset company with a primary strategy of acquiring and investing in non-operated minority working and mineral interests in the premier hydrocarbon producing basins within the contiguous United States.”

XCL’s site includes a tagline which states, “integrating people, culture, and technology to maximize Uinta basin’s potential for all stakeholders.”

Source: www.rigzone.com

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