Through Melissa Karsh and David Wethe at 8/6/2021
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(Bloomberg) –KKR & Co. is building a shale oil acquisition vehicle out of the $ 5.7 billion combination of two little-known explorers.
The buyout firm’s Independence Energy will merge with Contango Oil & Gas Co. in an all-stock deal that will be used to seek even larger deals, Contango chairman John Goff told analysts at the time. of a conference call Tuesday.
KKR is going against the trend among private equity firms that have offloaded their shale investments after consecutive drops in the oil market. After years of poor returns and growing debt, shale drillers were already in disgrace when the Covid-19 pandemic crushed demand for energy. KKR’s move could signal a bullish turn, with U.S. crude prices heading for the best annual performance since 2015.
“With increased firepower, we can add a zero to the size of the deals we’ve executed,” said Goff, who is Contango’s largest shareholder. With combined adjusted profits in 2022 of up to $ 800 million, the new company will be “massively bigger than we are today.”
Contango shares jumped 23% at the start of US trading, but have since backed off those gains and are down 5.5% as of 10:43 a.m. in New York.
The combined company’s footprint will include assets in major oil and gas basins from Texas to Colorado, according to a statement that confirmed a previous Bloomberg News report. In the end, the shareholders of Independence will control approximately 76% of the company and the shareholders of Contango the rest.
“We believe this is the right way to run an oil and gas business and we are well positioned for the future,” said David Rockecharlie, who leads the KKR team that will manage the combined business, in an interview. “Both companies have similar strategies in pursuing a differentiated business in terms of cash flow and risk. “
Other recent examples of such transactions include Pioneer Natural Resources Co.’s $ 6.4 billion purchase this year of DoublePoint Energy LLC and the planned acquisition of Crestone Peak Resources by its counterpart Civitas Resources Inc.
The new company, which will be based in Houston, is expected to operate under a new name and ticker symbol, and plans to apply for a listing on the New York Stock Exchange, the statement said. The deal is expected to be finalized in the third or fourth quarter of this year. The valuation of $ 5.7 billion includes debt.
New York-based KKR created Independence Energy in August 2020 to consolidate most of its energy assets through a private equity-for-equity acquisition. The company has rights to drill in the Permian, Eagle Ford, Barnett and other shale regions, as well as mining and royalty interests and intermediate infrastructure.
Rockecharlie, director of KKR Energy Real Assets, will be the managing director of the new company while Goff will be its chairman. Contango CEO Wilkie Colyer and Chairman Farley Dakan will continue to manage Fort Worth, Texas-based Contango as an operating subsidiary of the new company and focus on expansion through acquisitions.
Contango has made four acquisitions in the past 18 months, including an agreement in November to buy assets in the Big Horn, Permian and Powder River basins through a liquidation of bank-owned assets.
“When I look at the industry context, it is still ripe for continued consolidation,” Goff said in an interview. “We are tracking a lot of opportunities for stranded assets and businesses that are either in the hands of unnatural owners or they have too much leverage or they have too much overhead and just can’t really survive this time of the year. energy sector.
Colyer pointed out that Contango’s portfolio of so-called conventional assets in the Rocky Mountains, Great Plains and Permian Basin are areas where the company is expected to continue to grow.
Rockecharlie said the combined company’s largest basin will be South Texas’s Eagle Ford, which he says was largely overlooked during a Permian rush in West Texas and New Mexico.
“We have a lot of financial flexibility without needing to increase the relative measures of debt,” said Rockecharlie. “We can be a quality company over time; that’s what we’re focusing on. But that will not limit our ability to acquire over time.