Earthstone Announces Northern Delaware Basin Asset Acquisition for $604M

Source: 12/16/2021, Location: North America

Earthstone Energy, Inc. (ESTE) ("Earthstone") announced that it has entered into an agreement (the "Agreement") to acquire the assets of privately held Chisholm Energy Holdings, LLC ("Chisholm") located in the northern Delaware Basin of New Mexico (the "Chisholm Acquisition"). Chisholm is majority owned by Warburg Pincus, LLC and its affiliates ("Warburg Pincus").

The aggregate purchase price of the Chisholm Acquisition is approximately $604 million consisting of $340 million in cash at closing, subject to customary closing adjustments, $70 million of deferred cash due over the 12 months after closing and approximately 19.4 million shares of Earthstone's Class A common stock valued at $194 million based on a closing share price of $9.98 on December 15, 2021. The effective date of the Chisholm Acquisition will be November 1, 2021, with closing anticipated in the first quarter of 2022. The cash portion of consideration is expected to be funded with cash on hand and borrowings under the Company's senior secured revolving credit facility (the "Credit Facility"). Earthstone has obtained commitments from a group of existing lenders to increase the borrowing base and elected commitments under its Credit Facility from $650 million to $825 million upon closing.

Chisholm Asset Highlights:

- Current net production of ~13,500 Boepd (61% oil, 79% liquids) (1)

- $421 million Proved Developed PV-10 (2) as of 11/1/21 with reserves of approximately 25.8 MMBoe (3)

- Asset level projected 2022 Adjusted EBITDAX of approximately $190-200 million (4,5)

- Low-cost, high-margin producing assets generating significant Free Cash Flow (4,5)

- Approximately 36,100 net acres (92% operated, 55% WI, 85% HBP) in the core of the Delaware Basin in Eddy and Lea Counties, New Mexico

- Large, high-return, de-risked drilling inventory with 414 gross / 237 net operated identified locations focused on 1st, 2nd and 3rd Bone Spring and Wolfcamp A formations with additional potential upside locations

- Chisholm is currently operating a two-rig drilling program, which Earthstone plans to maintain on the acquired assets (in addition to the two rigs Earthstone is running in the Midland Basin)

Impact on Earthstone:

- Expected to increase Earthstone's net production by ~39%, Adjusted EBITDAX by ~49% and Free Cash Flow by ~100% in - 2022 (vs. Earthstone standalone) (6), while only increasing share count by 22%, driving significant per share accretion
- 2022 preliminary pro forma snapshot (6):
- 44,000-48,000 Boepd of production (53% oil, 75% liquids)
- $550-580 million of Adjusted EBITDAX
- $385-415 million of capital expenditures
- $130-150 million of Free Cash Flow

- Maintains conservative balance sheet metrics with low leverage
- Targeted Debt / Adjusted EBITDAX of ~1.0x by year-end 2022 would be approximately leverage neutral to anticipated year-end 2021 Debt / Adjusted EBITDAX

- Increases Earthstone's Permian Basin acreage by over 35% to ~138,000 net acres

- Earthstone anticipates continuously running four rigs in 2022, maintaining the two rigs currently being operated by each of Earthstone and Chisholm in the Midland Basin and the Delaware Basin, respectively

- Formal 2022 full year guidance to be announced in conjunction with closing of the Chisholm Acquisition

Robert J. Anderson, President and CEO of Earthstone, commented, "The Chisholm Acquisition caps off a series of highly-accretive and value-adding transactions that have dramatically transformed Earthstone during 2021 and further establishes Earthstone as a Permian Basin focused company with increasing scale. When this acquisition is combined with the previous four acquisitions completed in 2021, we will have increased our Permian Basin net acreage footprint by approximately 400%, almost tripled our daily production rate and meaningfully increased Free Cash Flow generation capacity. In particular, the Chisholm Acquisition expands our operations into the Delaware Basin with low cost, high margin assets that are generating significant production and cash flow from existing producing wells while also providing growth opportunities from a high-return drilling inventory. Additionally, the significant size of this transaction increases our scale materially and positions us to build on our corporate and field level operating efficiencies and drive additional cost savings.

"Importantly, we have successfully added substantial size and scale while maintaining our balance sheet strength. As in previous acquisitions, we are using a mix of cash and equity to acquire high margin producing assets that generate Free Cash Flow while positioning Earthstone to achieve target leverage of approximately 1.0x Debt to EBITDAX by year-end 2022.

"We are especially excited about the size and quality of the drilling inventory included in the Chisholm transaction, and plan to continue the two-rig program in the Delaware Basin in addition to our two-rig program in the Midland Basin. Our increased inventory of high-return drilling locations will enhance our organic growth. Through a four-rig drilling program in 2022 we expect to be Free Cash Flow positive and continue our current momentum."

Transaction Consideration and Sources

The consideration for the Chisholm Acquisition consists of approximately 19.4 million shares of Earthstone's Class A common stock to be issued to Chisholm, which will represent 18% of total Class A and Class B common stock on a pro forma basis, and a cash amount of $340 million based on the effective date (subject to customary closing adjustments) and an additional $70 million of deferred cash due within the twelve months after closing.

Warburg Pincus, a current beneficial owner of ~15.1% of Earthstone's total Class A and Class B common stock, is expected to indirectly receive ~13.2 million shares of Class A common stock through its majority ownership of Chisholm. Adjusted for the equity consideration expected to be issued, Warburg Pincus's beneficial ownership of Earthstone's total Class A and Class B common stock will be increased to approximately 24.7%.

Earthstone intends to fund the cash portion of the consideration and fees and expenses with cash on hand and new borrowings under its Credit Facility, under which it has received commitments from a group of existing lenders to increase the borrowing base and available commitments from the current $650 million to $825 million in conjunction with closing of the Transaction.


The audit committee of the board of directors of Earthstone (the "Audit Committee") has independently approved and recommended the Chisholm Acquisition to the full board of directors of Earthstone, which has approved the Chisholm Acquisition. Stockholders holding approximately 55.4% of the outstanding voting power of Earthstone (including disinterested stockholders holding approximately 56.1% of the outstanding disinterested voting power) approved the share issuance by written consent. No further stockholder approval is required. Earthstone plans to mail a definitive information statement to stockholders at least 20 days prior to closing.

The Chisholm Acquisition has been approved by the board of directors and members of Chisholm.

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