The $7 billion “merger of equals transaction” will create the largest pure-play E&P company in the Delaware Basin of the Permian with approximately 180,000 net leasehold acres and 135,000 boe/d of current production.
“This transformative combination significantly increases scale and drives accretion across all our key financial and operating metrics. Colgate’s complementary, high-margin assets are a natural fit for Centennial, creating the largest pure-play E&P company in the Delaware Basin,” Centennial CEO Sean Smith commented in a joint company release.
“Importantly,” Smith added, “the combined company is expected to provide shareholders with an accelerated capital return program through a fixed dividend coupled with a share repurchase plan.”
Colgate Energy is a privately held independent Permian and Delaware Basin operator based in Midland, Texas, and founded in 2015 that has played the long game in acquisitions, with roughly $1 billion in announced deals in the past four years. Backed by Pearl Energy Investments and NGP, Colgate, however, was reported to be considering an IPO last December that sources said would value the company at around $4 billion.
Meanwhile, Centennial Resource Development is a Denver-based independent that went public in 2016 following its merger with Silver Run Acquisition Corp., a blank-check company led by industry icon Mark Papa who would go on to lead Centennial until his retirement in 2020.
Upon closing, the combined company will have over 15-years of drilling inventory, assuming its current drilling pace, the companies expect will generate over $1 billion of free cash flow in 2023 at current strip prices.
The merger values Colgate at about $3.9 billion and consists of 269.3 million shares of Centennial stock, $525 million of cash, and the assumption of about $1.4 billion of Colgate’s outstanding net debt.
The cash consideration and the repayment of Colgate’s outstanding credit facility borrowings at closing are expected to be funded with cash on hand and borrowings under an upsized revolving credit facility. Further, the combined company’s net debt-to-LTM EBITDAX ratio at closing is approximately 1.0x, given existing cash balances and interim free cash flow.
The combined company will be headquartered in Midland and led by Colgate co-founders Will Hickey and James Walter as co-CEOs. The remaining key positions will be filled by representatives from both companies, according to the release. Centennial CEO Smith will serve as executive chair of the board of directors of the newly combined business.
The combined Permian company will also operate under a new name and stock ticker symbol, which are expected to be announced prior to closing.
Commenting on the transaction, Hickey said: “The Colgate and Centennial teams have each demonstrated a track record of execution through the years, and we are excited to assume leadership roles in the new company to build upon that success and guide the next phase of value creation. Both companies have established strong financial and operational cultures, and we expect the combined company will be a top-tier, low-cost operator that is able to deliver better margins and shareholder returns.”
“The merger of Colgate and Centennial is compelling from a financial, operational, and strategic standpoint, establishing a leading Permian Basin independent,” Walter added. “We believe the pro forma company is positioned to maximize returns for our new investor base, with our combined management team bringing a track record of operational excellence and strategic value creation. Management’s significant ownership in the combined company should give investors confidence that long-term value creation will always be our top priority.”
Upon closing, the combined company will have one of the largest management ownership interests of any public E&P company, according to the release, with the management team owning approximately 12% of the pro forma total shares outstanding. The companies expect that this will result in a higher focus on increasing shareholder value.
Existing Centennial shareholders are expected to own approximately 53% of the combined company, and existing Colgate owners will own approximately 47% of the combined company.
Following the merger, Centennial’s board of directors will be expanded to 11 directors. In addition of Smith, Hickey, and Walter plus six independent directors, the new Centennial board will include Robert Tichio, partner of Riverstone Holdings LLC—Centennial’s largest shareholder, and William Quinn, founder, and managing partner of Pearl.
“Centennial and Colgate are a clear strategic fit, combining two complementary acreage footprints in the core of the Permian & Delaware Basin,” Quinn commented in the release. “We are firm believers in the combined management team and their strategy, and we look forward to creating additional long-term value for stakeholders.”
The closing of the merger is subject to customary closing conditions, including approval by Centennial shareholders and regulatory approvals.
Citi is the financial adviser and Latham & Watkins LLP is the legal adviser to Centennial for the transaction. Credit Suisse Securities (USA) LLC and Jefferies LLC are financial advisers and Kirkland & Ellis LLP is legal adviser to Colgate.