Oil & Gas Investor, by Emily Patsy
Cimarex Energy Co. (NYSE: XEC) said Nov. 19 it will acquire Delaware Basin pure-play Resolute Energy Corp. (NYSE: REN) in a cash-and-stock transaction worth about $1.6 billion that includes the assumption of $710 million debt.
Resolute, which has faced recent investor pressure to pursue a sale or merger, is a “bolt-on asset … tailor-made for Cimarex,” said Thomas E. Jorden, chairman, president and CEO of Cimarex.
Based in Denver, Resolute controls 21,100 net acres, 89% HBP, within the Delaware in Reeves County, Texas. The company holds an average 79% working interest, 97% operated. Production averaged 34,752 barrels of oil equivalent per day (boe/d) during third quarter.
Cimarex expects the acquisition of Resolute will increase its 259,000 net acre position in the Delaware Basin by 34%.
“It is a perfect fit with our existing Reeves County position and will allow us to leverage our knowledge and deliver superior results over a broader asset base for the benefit of both Cimarex and Resolute shareholders,” Jorden said in a statement.
Pro forma, the combined companies will hold roughly 280,100 Delaware Basin net acres, of which 82,953 are located in Reeves, and combined production of 253,400 boe/d. The overall combined enterprise value for the companies is $10.7 billion.
Additionally, Cimarex expects the combined companies to generate free cash flow in 2020.
Additionally, Jorden expects the Resolute assets to generate free cash flow in 2019, “basically funding any additional development capital from the start,” he said.
The Resolute acreage fits Cimarex’s position “like a glove” plus the valuation is right, said Mike Kelly, senior analyst with Seaport Global Securities.
“Cimarex sat on the M&A/A&D sidelines over the last few years, refusing to pay $40,000 per acre for non-accretive Permian deals that were acreage heavy, but light on cash flow,” Kelly said in a Nov. 19 research note. “We think the patience was worth it and that the Resolute acquisition is right in Cimarex’s wheelhouse.”
Kelly estimates Cimarex is paying about $22,000 per acre for the Resolute acquisition, a discount of over 20% to average Delaware E&P, he said.
“We think this deal will truly add shareholder value—it’s accretive, acreage quality is better than Cimarex’s portfolio average and oilier, it won’t stretch the balance sheet, the assets are already free cash flow positive, plus the potential upside on the synergies front is meaningful,” he said.
In late October, private-equity firm Kimmeridge Energy Management Co. told Resolute’s board of directors in a letter that it was urging the company to merge with a rival. Further, the firm noted that Resolute continued to trade at a steep discount to its peers.
Kimmeridge owns about 10% of Resolute Energy stock.
Resolute CEO Rick Betz said in a statement on Nov. 19: “Our dedicated team of talented professionals has worked tirelessly to position this company to be able to capitalize on the tremendous opportunity this merger represents. The combination of our assets and people with the incredibly strong platform that Tom and his team at Cimarex have built will surely lead to superior results for the shareholders of both companies.”
Despite the step toward consolidation, Ben Dell, managing partner of Kimmeridge, believes the value from Resolute’s transaction with Cimarex still comes up short for investors.
“We are pleased to see that Resolute’s management team has finally acted and believe consolidation is required in this industry. However, we feel that the proposed purchase price undervalues Resolute,” Dell said in a statement.
Under the terms of the merger agreement, Resolute shareholders will have the right to receive 0.3943 shares of Cimarex common stock, $35 per share in cash, or a combination of $14 per share in cash and 0.2366 share of common stock. The consideration represents a roughly 14.8% premium to Resolute’s closing price of $30.49 on Nov. 16, the company release said.
Total consideration for the transaction is comprised of 60% stock and 40% cash after assumption of Resolute’s $710 million long-term debt. Cimarex plans to fund the cash portion of the transaction through a combination of cash on hand, which includes proceeds from the company’s recent asset sale in Ward County, Texas, and borrowings under its revolver.
Upon closing of the transaction, Cimarex shareholders will own about 94.4% of the combined company. Resolute shareholders will own roughly 5.6%.
Cimarex expects to complete the transaction by the end of first-quarter 2019. Upon closing, the board of directors and executive team of Cimarex will remain unchanged.