English
Español
عربي
Français
中文
日本語
How about that Eagle Ford-EF, basin? Sometimes you would think that the only place that E&P companies cared about was the Permian. It gets all the attention and the really big-tens of billions, deals in the M&A space have been focused there. But the Eagle Ford has seen a comparatively quiet resurgence in interest in the last several years, with a number of good sized-$2-3 bn dollar deals taking place, along with one $22 bn mega-deal between ConocoPhillips, (NYSE:COP), and Marathon Oil, NYSE:MRO). Production has remained in a fairly tight band for the last few years, a sign of the increased focus M&A activity has placed on the region, as operators apply new drilling and completion techniques to this venerable “Grand-Daddy” of shale.
The latest in a long string of outright mergers and bolt-on plays in the Eagle Ford, is the recently announced agreement between Crescent Energy, (NYSE:CRGY) and SilverBow Resources, (NYSE:SBOW). A $2.1 bn stock swap that carries up to a $400 mm cash election for SBOW holders. What the deal brings to CRGY is enhanced scale primarily. Except for the big block of acreage in Dimmit and Webb counties at the extreme southern part of the trend, the usual “Bolt-on” industrial logic doesn’t seem apparent, but scale counts for something. The company noted this point in the announcement-
“Scaled enterprise advantages and complementary assets expected to drive significant annual synergies of $65 to $100 million through immediate cost of capital savings and operating efficiencies.”
The SilverBow acreage is gassier than Crescent’s and that has contributed to a depressed stock price for SBOW. Structurally the combined company will have a more balanced production profile than they do separately, which enhances the value of the deal.
The combined company which will retain the name Crescent Energy will vault into the number two position in the EF in terms of daily output-250K BOEPD, behind only EOG Resources, (NYSE:EOG). Its acreage footprint will place it in the number three position behind EOG and Magnolia Oil and Gas, (NYSE:MGY).
The stock of CRGY has traded in a fairly tight range between $11.00 and $12.00 per share, since the May 20th announcement. A fact probably more related to the topsy-turvy price action of WTI, than any reflection on the market’s assessment of the merger. In this article we will take a look at several factors that could be driving interest in this Eagle Ford revival, and what the prospects for the new Crescent Energy might be.
The Eagle Ford
The Eagle Ford was one of the first breakout shale plays in the 2008 to 2010 era. Intense drilling activity drove production to ~1.7 mm BOEPD all-time peak by 2015. This was followed by a crash toward a million BOEPD over the next several years in the post-OPEC price war with U.S. shale producers. A price led rally in the late teens took EF output back toward 1.5 mm BOEPD, but post-Covid tighter budgets kept in the current 1.1 mm BOEPD range. Operator interest had also shifted to the multi-zonal Permian basin where daily output was rising at a prolific rate.
Then in 2022 M&A activity hit the EF in a big way, starting with Devon Energy’s, (NYSE:DVN) $1.9 bn purchase of Validus, followed a few months later by Marathon’s, (NYSE:MRO) $3.0 bn take out of Ensign Natural Resources. The deal making continued at a torrid pace into 2023 with a number of other deals, as noted in a recent RBN Energy blog post.
- Spanish energy giant Repsol’s February 2023 purchase of the South Texas acreage and production of Japan’s INPEX Corp. for an undisclosed amount.
- U.K.-based INEOS’s purchase of some of Chesapeake Energy’s South Texas assets for $1.1 billion — a deal that was finalized in May 2023.
- Canadian producer Baytex Energy’s June 2023 acquisition of Eagle Ford pure-play Ranger Oil in a cash-and-stock deal valued at $2.2 billion.
- The $551 million purchase by privately held Ridgemar Energy of Callon Petroleum’s Eagle Ford assets, which closed in July 2023.
- Then there is the recently announced, $22.5 billion plan by ConocoPhillips to acquire Marathon Oil —both companies have a significant presence in the Eagle Ford.
There are several drivers other than increased scale, for all of this M&A in my view. The first is, that technology has come a long way-longer laterals, enhanced fracking techniques, well spacing, and AI reservoir imaging, since the early days. This creates an opportunity to go back into these wells and fields and squeeze out hydrocarbons that were left behind. Second, the EF is close to the emerging global export hub in Corpus Christie for crude oil and LNG. With the gathering and takeaway infrastructure already in place from earlier EF development, current production is advantaged by having a ready market and infrastructure in place. Finally, much of the EF consolidation has been driven by a desire to increase the oil cut of daily production. Gas prices have been in the dumps for a couple of years, and companies have used M&A in the EF to improve their product mix.
Crescent Energy Pro Forma
Both Crescent and SilverBow have histories of debt fueled growth by acquisition, resulting in balance sheets that are little over-leveraged for the market’s current view toward debt. The Pro Forma company will have leverage of 1.5X, but noted in the release that a reduction to 1X would be a priority. Crescent has no maturities until 2028, giving a chance to reschedule SilverBow’s debt at better rates with maturities in 2029 and beyond. Through its RBL the Pro Forma company will have liquidity of $700 mm.
Analyst’s rank Crescent as a standalone company as a buy with upside price targets ranging from $14-21.00 per share. CRGY has a recent history of substantially exceeding EPS estimates with Q-1, 2024 coming in at $0.50 vs an estimate of $0.20. Estimates for Q-2 are 50% higher over Q-1 at $0.34. On a technical basis the stock appears ready to mount an assault on upper resistance at $12.02, buoyed by rising EPS estimates for Q-3.
Your takeaway
ADVERTISEMENT
At current levels the company is trading at just over 3X EV/EBITDA and $23K per flowing barrel. Both of those are pretty solid metrics that the Pro Forma company will maintain. Shareholders of SilverBow will receive 3.125 shares of CRGY for each share of SBOW tendered. Depending on the amount of cash elected in lieu of stock, SBOW holders will own between 21-31% of Newco.
CRGY pays a modest but competitive dividend-$0.48 yielding 4.06%, which certainly has potential to be raised as debt levels are brought into line with targets. The company also has authorization for up to a $150 stock repurchase.
Accordingly CRGY looks like a strong buy at present levels. For reference the COP/MRO deal is going out at 5X EV/EBITDA and $54K per flowing barrel, of which 127K comes from the EF.
By David Messler for Oilprice.com
More Top Reads From Oilprice.com:
- Where Are Global Precious Metals Prices Heading?
- Bill Gates and Warren Buffett Team Up to Transform Nuclear Power
- AI and EV Boom To Add 290 TWh of New Electricity Demand in the U.S.
