Bonanza Announces Transformative Agreement to Acquire Restructured HighPoint Resources

Source: 11/9/2020, Location: North America

Bonanza Creek Energy, Inc. and HighPoint Resources Corporation announced that they have entered into a definitive merger agreement to combine Bonanza Creek and HighPoint in a transaction valued at approximately $3761 million as of November 6, 2020. The transaction value is based on the equity to be issued to HighPoint equity holders, the equity and debt to be issued to HighPoint debt holders in connection with the Exchange Offer (as defined below) and the remaining debt to be assumed. Bonanza Creek will issue 9.8 million shares of common stock and up to $100 million in senior unsecured notes in the transaction. The transaction has been unanimously approved by the board of directors of each company.

The strategic combination is expected to create the leading unconventional oil producer in rural Weld County and to significantly increase free cash flow and economic resilience. With its enhanced operating scale and significant increase in free cash flow, the Company plans to pursue a business model focused on strong capital returns to its shareholders. Highlights of the transaction include:

- Materially increases Bonanza Creek’s scale based on expected pro forma fourth quarter production of 50,000 Boe/d (53% oil) and a rural Weld County leasehold position of 206,000 net acres
- Significantly increases expected pro forma 2021 levered free cash flow2 to ~$130 million.
- Expected to result in approximately $31 million in 2021 synergies on a pro forma basis, with $150 million of PV10 synergies total, which represents nearly 45% of Bonanza Creek’s market capitalization at announcement
- Maintains strong balance sheet with an estimated pro forma leverage ratio less than 0.7x at the estimated closing date
- Low cost operations with anticipated pro forma cash costs3 between $9.00 and $10.00 per Boe

Transaction Details
Under the terms of the definitive merger agreement, Bonanza Creek and HighPoint have agreed to commence a registered exchange offer and consent solicitation (the “Exchange Offer and Consent Solicitation”) and simultaneous solicitation of a prepackaged plan of reorganization under Chapter 11 of the United States Bankruptcy Code (the “Prepackaged Plan”). The Exchange Offer and Consent Solicitation will be conditioned on a minimum participation of not less than 97.5% of the aggregate outstanding principal amount of HighPoint senior unsecured notes (the “HighPoint Notes”) (the “Minimum Participation Condition”).

If the Minimum Participation Condition is met, and if certain customary closing conditions are satisfied (including approval by each company’s shareholders), the companies will effect the Exchange Offer and Consent Solicitation, and Bonanza Creek will acquire HighPoint at closing outside of chapter 11.

Upon a successful Exchange Offer and Consent Solicitation, the HighPoint Notes will be stripped of substantially all protective covenants, including covenants restricting incurrence of secured debt and asset dispositions, which could result in the incurrence of secured debt by, or the transfer of assets, from HighPoint. The HighPoint Notes will also be amended to eliminate certain events of default. Prior to the Exchange Offer and Consent Solicitation, the HighPoint Notes will be amended to permit transactions described herein without triggering a change of control and, as a result, no change of control offer will be made upon consummation of the transactions. Upon a successful out-of-court Exchange Offer and Consent Solicitation, tendered HighPoint Notes shall receive cash in the amount of any accrued and unpaid interest on such HighPoint Notes from the most recent payment date to, but excluding the closing date.

If the Minimum Participation Condition is not met, HighPoint intends to file voluntary petitions under Chapter 11 with the United States Bankruptcy Court for the District of Delaware (the “Court”) to effectuate the solicited Prepackaged Plan and consummate the transaction. The consummation of the Prepackaged Plan will be subject to confirmation by the Court in addition to other conditions to be set forth in the Prepackaged Plan, a transaction support agreement (the “TSA”) and related transaction documents, but approval of the transaction by HighPoint shareholders will not be required.

The transaction is expected to close in the first quarter of 2021 under the Exchange Offer and Consent Solicitation or no later than the second quarter of 2021 under the Prepackaged Plan.

Upon completion of the transaction, Bonanza Creek shareholders will own approximately 68% of the combined company and HighPoint’s stakeholders will own approximately 32%. Existing HighPoint shareholders will own approximately 1.6% of the combined company while participating HighPoint noteholders will receive in the aggregate shares representing approximately 30.4% of the combined company and up to $100 million of newly issued 7.50% senior unsecured notes due 2026. Based on the number of shares of HighPoint common stock outstanding and those subject to equity-based awards, the transaction implies an exchange ratio of 0.114 shares of Bonanza Creek common stock for each share of HighPoint common stock.

Upon closing, Bonanza Creek’s balance sheet is expected to consist of approximately $50 million of cash, $100 million of senior unsecured notes, and approximately $150 million of reserve based lending (“RBL”) debt. We expect that the RBL for the combined company will be determined in the coming weeks. The combined asset base will likely support a borrowing base well in excess of Bonanza’s current $260 million borrowing base, near our existing level.

The Company and Fifth Creek Energy Company LLC (“Fifth Creek”), which owns approximately 46.5% of the outstanding shares of HighPoint, have entered into a support agreement whereby Fifth Creek will vote in favor of the Merger (as defined below), subject to certain customary termination rights. Additionally, HighPoint, Fifth Creek, and holders of (x) 73% of the 7.0% Senior Notes of HighPoint due October 15, 2022 and (y) 97% of the 8.75% Senior Notes of HighPoint due June 15, 2025 have entered into the TSA, which obligates Fifth Creek and the noteholder parties to support and vote in favor of the transaction, subject to specified termination rights.

Stakeholder Commentary
“The combination of Bonanza Creek and HighPoint creates significant scale in the rural DJ Basin, which will immediately increase free cash flow generation,” said Eric Greager, President and Chief Executive Officer of Bonanza Creek. “The combination of our complementary asset bases will yield significant synergies and represents a transformative transaction for Bonanza Creek.”

Scot Woodall, Chief Executive Officer and President of HighPoint, stated, “This transaction will create a premier DJ Basin player with a peer leading cost structure and a large, attractive rural footprint. The transaction provides HighPoint stakeholders with the opportunity to participate in a larger DJ Basin producer with both an attractive balance sheet and free cash flow profile.”

Brendan Circle, SVP/Portfolio Manager at Franklin Advisers, HighPoint’s largest noteholder, commented, “We are excited to become a shareholder of the new Bonanza Creek. Bonanza Creek exhibits a number of the qualities that we look for in investment opportunities: strong management, an excellent balance sheet, attractive free cash flow profile, and an ability to return significant cash flow to its shareholders. We look forward to forging this new relationship with the Bonanza Creek team.”

Strategic Rationale
- Creates the Leading Rural DJ Producer – On a pro forma basis, Bonanza Creek will have approximately 206,000 net acres in Weld County. Approximately 100% of the pro forma acreage will be unincorporated acreage not subject to regulation by municipalities, and only approximately 8% of the acreage will be subject to Federal mineral or surface regulations. Bonanza Creek remains committed to engaging community stakeholders to ensure safe, thoughtful, and responsible development.
- Enhances Size and Scale – On a pro forma basis, fourth quarter 2020 production is expected to be approximately 50,000 Boe/d, with oil representing ~53%.
- Disciplined Capital Allocation – The transaction is expected to accelerate Bonanza Creek’s transition to a business model that focuses on free cash flow generation by increasing projected free cash flow to approximately $130 million in 2021, assuming NYMEX strip pricing. The Company will use excess free cash flow to reduce debt, return capital to shareholders, reinvest in the business, and pursue additional value-driven consolidation opportunities.
- Drives Significant Synergies – Bonanza Creek expects the strategic combination to generate significant synergies of $150 million in present value, including $15 million of near-term capital expenditures savings. In 2021, the Company expects synergies to be $31 million consisting of savings from general and administrative expenses, lease operating expenses and capital expenditures. Additionally, the integration of HighPoint’s midstream infrastructure into Bonanza Creek’s Rocky Mountain Infrastructure should provide additional flow assurance, operating and surface cost efficiencies and greater flexibility to third-party processing and takeaway.
- Maintains Strong Balance Sheet and Liquidity – Bonanza Creek expects to maintain its strong financial position with an estimated pro forma net debt-to-EBITDAX ratio at the estimated closing date under the Exchange Offer and Consent Solicitation of less than 0.7x on 2021 EBITDAX.
- Accretive to Financial Metrics – The transaction is expected to be immediately accretive in the first year to all relevant per-share-metrics, including cash flow, free cash flow, and net asset value. The transaction is also expected to be accretive to general and administrative expenses per Boe and lease operating expenses per Boe.

Governance and Leadership
Following the completion of the transaction, the board of directors of the combined company will consist of 7 members: 5 directors from Bonanza Creek and 2 selected by HighPoint’s supporting noteholders. Eric Greager will serve as the CEO of the combined company and Brian Steck will serve as chairman of the board.

Preliminary Pro Forma 2021 Outlook
Bonanza Creek’s long-term strategy is to be a low-cost operator focused on generating free cash flow and returning cash to shareholders. In 2021, the Company is expected to generate approximately $130 million of free cash flow assuming NYMEX strip pricing. Full year production is expected to average between 45,000 and 50,000 Boe/d. Bonanza Creek expects its combined cash costs to be between $9.00 and $10.00 per Boe.

Tax Plan
In connection with the transaction, Bonanza Creek has entered into a tax benefits preservation plan designed to protect the availability of the Company’s existing net operating loss carryforwards and other tax attributes (collectively, the “Tax Benefits”). The Company’s ability to use its Tax Benefits would be substantially limited if it were to experience an “ownership change,” as defined under Section 382 of the Internal Revenue Code. Further details of the tax benefits preservation plan are provided in a separate Bonanza Creek announcement issued today.

Evercore is serving as financial advisor and Vinson & Elkins LLP is serving as legal advisor to Bonanza Creek. Tudor, Pickering, Holt & Co. / Perella Weinberg Partners are serving as financial advisor, Kirkland & Ellis LLP is serving as legal advisor, and AlixPartners, LLP is serving as restructuring advisor to HighPoint. Akin Gump LLP is serving as legal advisor to an informal group of HighPoint Noteholders that have signed the TSA. J.P. Morgan Securities LLC also served as an advisor to HighPoint.

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