zhengzaishuru
Earth energy (NYSE: this) is being acquired by Permian Resources (NYSE: PR) of approximately $4.5 billion (including the assumption of net debt).This will create a combined company producing approximately 300,000 BOEPD and over 400,000 Permian Net Acres. Both companies have grown substantially through acquisitions/mergers over the years.
My independent valuation of Earthstone is about $17 per share, compared to Permian’s independent valuation of $12 per share a month ago. This ratio is 1.417 to 1. Therefore, Permian’s offer of 1.446 Permian shares for 1.0 Earthstone shares seems reasonable to me.
Assuming Permian is able to realize most of the projected synergies from the deal, I’d raise its estimated value to around $13 per share.This figure will increase to approximately $13.50 per share if the expected $175 million per year target is met after the acquisition save.
Transaction Notice
The transaction is structured as an all-stock transaction at the rate of 1.446 Permian shares for 1.0 Earthstone shares. Based on Permian’s closing price on Aug. 18, Earthstone was valued at $18.64 per share.
As part of the transaction, Permian is expected to issue approximately 211 million shares, giving existing Earthstone shareholders approximately 27 percent of the combined company. The combined company will have 777 million shares outstanding.
Shareholders owning 49% of Permian and 48% of Earthstone’s outstanding shares have signed voting and support agreements related to the transaction, which is expected to close by the end of 2023.
Earthstone’s Standalone 2H 2023 Outlook
Earthstone expects average production to be around 125,000 BOEPD (41% oil) in the second half of 2023. These include production of 117,500 BOEPD (41% oil) in Q3 2023 and 132,500 BOEPD (41% oil) in Q4 2023. The guidance includes 1.5 months of Novo production in Q3 2023 and a full three months of Novo production in Q4 2023.
Earthstone’s previous share of Novo’s production was around 38,000 BOEPD, but Earthstone expects to reduce this to around 30,000 BOEPD to improve near-term cash flow generation.
At the current high of $70, Earthstone is expected to generate $950 million in revenue (including hedging) by the second half of 2023. Earthstone’s H2 2023 hedge estimate is worth about negative $30 million, as nearly 60% of its H2 2023 natural gas production is hedged on a Waha basis, which trades at negative $1.67 on Nymex.
The Waha spread has narrowed significantly, resulting in projected hedging losses, but also raising the actual price of Earthstone gas (before hedging).
| type | unit | USD/unit | One million U.S. dollars |
| oil (barrel) | 9,430,000 | $77.00 | $726 |
| NGL (barrel) | 6,325,000 | $24.00 | $152 |
| natural gas [MCF] | 43,470,000 | $2.35 | $102 |
| hedging value | -$30 | ||
| Total revenue | $950 |
As a result, Earthstone expects to generate $184 million in free cash flow in the second half of 2023 at current strip prices.
| spend | One million U.S. dollars |
| Lease operation | $207 |
| production tax | $86 |
| cash management fee | $30 |
| cash interest | $70 |
| Capital expenditures | $373 |
| Total cost | $766 |
As of the end of the second quarter of 2023, Earthstone had net debt of $1 billion. It also paid a $75 million down payment for the acquisition of Novo. In addition to this deposit, Earthstone ultimately paid approximately $860 million when the purchase price was adjusted to close the Novo acquisition.
That brings Earthstone’s net debt to $1.86 billion. Earthstone expects free cash flow in the second half of 2023 to reduce its net debt to approximately $1.68 billion before changes in working capital. However, Earthstone does have a working capital deficit, which is expected to be around $1.87 billion by the end of 2023 if its working capital deficit is factored into net debt.
Valuation Considerations
In a long-term (after 2023) $75 WTI oil and $3.75 NYMEX natural gas environment, my latest estimate for standalone Earthstone is worth around $17 per share. Thanks to the recent improvement in commodity prices, combined with the impact of the subsequent acquisition of Novo, the price per share is up $1.50 from when I checked in May.
At the end of July, I also estimated that Permian Resources was worth about $12 per share. This results in a relative value of 1.4167 Permian shares to 1.0 Earthstone shares. Therefore, the ratio of 1.446 Permian shares to 1.0 Earthstone shares seems fairly fair to me.
Permian expects total annual synergies of approximately $175 million due to improved capital efficiency, lower midstream costs and lower general and administrative expenses.
Earthstone Transaction Synergies (permianres.com)
If Permian is able to realize most of these savings, I estimate Permian is worth about $13 per share in a long-term $75 WTI oil and gas environment. The annual savings of $175 million would increase Permian’s value to around $13.50 per share.
Based on the ratio of 1.446 Permian shares to 1.0 Earthstone shares, Earthstone is worth approximately $18.80 and $19.52 per share, respectively.
in conclusion
Permian Resources is acquiring Earthstone Energy in a deal valued at approximately $4.5 billion and 1.446 Permian shares for 1.0 Earthstone share. Given my estimated stand-alone value of $17 per share for Earthstone and $12 per share for Permian (a ratio of 1.417 to 1.0), this seems like a fair price.
The expected savings and efficiency gains from the transaction could boost Permian’s value to approximately $13 per share (assuming the majority of savings are realized) to $13.50 per share (assuming projected savings of $175 million per year). This also relates to my long-term commodity prices: oil at $75 and natural gas at $3.75.
So I think both Earthstone and Permian are fairly priced right now for a $75 oil and $3.75 natural gas long-term commodity pricing environment.
