Two major DJ Basin producers are merging this morning with the combination of PDC Energy and SRC Energy in an all-stock transaction valued at $1.7 billion including assumption of SRC’s net debt of $685 million. The deal creates the second largest producer in the DJ Basin (behind the pro-forma numbers of the Oxy/Anadarko combination created in 2019s mega-deal and ahead of Noble) and the company will hold a total of 182,000 net acres in the DJ (entirely in Weld County, Colorado) along with PDC’s 36,000 net acres position in the Delaware Basin.
“This deal looks to be right down the fairway for the consolidation needed among Small-to-Mid Cap E&Ps to help push towards strengthened financial metrics and restore investor confidence in a very challenging market,” said Enverus Senior M&A Analyst Andrew Dittmar.“ It is a low-to-no premium deal that is less about getting shareholders paid immediately via the transaction and more about building a larger, more efficient developer. The acreage positions fit like a glove in the DJ Basin, and pro-forma companies expect G&A synergies of $40 million in 2020.”
“While PDC does have a position in the Delaware Basin, it didn’t quite match up with the scale of its core Colorado holdings and this deal obviously further commits PDC to be a Colorado producer,” added Dittmar.
In addition to already having a larger position in the DJ, PDC may have been drawn to the valuation of its fellow Colorado producer. Companies like SRC along with fellow DJ E&Ps HighPoint Resources and Extraction Oil & Gas have seen their stock sold on Wall Street to the point that their enterprise value roughly equals the value of their existing production. That creates the opportunity to add accretive cash flow in a deal while securing future drilling inventory as a bonus.
PDC is likely also hoping that creating a larger company and more substantial production base helps lesson the activist pressure it has come under including a proxy challenge from Kimmeridge Energy Management.
On the headline this deal looks to check all the boxes Wall Street has asked for including consolidation of duplicate corporate structures, sticking to a basin the buyer knows well, and not overpaying on premium. Now the test will be how investors react with the deal in front of them. A positive reaction could help spur further deals of this type which is almost certainly healthy for the overall shale industry.
