Earthstone Energy to buy Delaware Basin-focused Novo Oil & Gas for $1.5 billion

Earthstone Energy

THE WOODLANDS, Texas -- Earthstone Energy, Inc. (NYSE: ESTE) (“Earthstone”, the “Company”, “our”, or “we”) today announced that it has entered into an agreement (the “Agreement”) to acquire Novo Oil & Gas Holdings, LLC (“Novo”), a privately-held Delaware Basin focused E&P company backed by EnCap Investments L.P. (“EnCap”), for $1.5 billion. Concurrently, Northern Oil and Gas, Inc. (NYSE: NOG) (“Northern”) will acquire working interests equal to a pro-rata 33⅓ % of the oil and gas assets of Novo for $0.5 billion from Earthstone, resulting in a $1.0 billion purchase price net to Earthstone for the retained 66⅔ % interest (the “Novo Acquisition”). Consideration at closing will be subject to customary purchase price adjustments. The effective date of the Novo Acquisition is May 1, 2023, and closing is anticipated to occur in the third quarter of 2023, subject to customary closing conditions.  

The Novo Acquisition is expected to be funded with cash on hand and borrowings under the Company’s senior secured revolving credit facility (the “Credit Facility”). In conjunction with the Novo Acquisition, Earthstone has secured $250 million of incremental commitments from existing lenders. This increases elected commitments under Earthstone’s Credit Facility from the current $1.4 billion to $1.65 billion and provides for ~$1.2 billion in undrawn commitments at closing based on $452 million debt outstanding as of March 31, 2023.  

Robert J. Anderson, President and CEO of Earthstone, commented, “Over the past few years, we strategically positioned the Company as a significant operator in the Permian Basin. In 2022, we materially advanced our consolidation strategy, closing three accretive acquisitions totaling ~$2.0 billion, including two significant northern Delaware Basin asset acquisitions. I am pleased that we are continuing to further our consolidation strategy with today’s announcement of the Novo Acquisition as we further build our northern Delaware Basin asset base. With significant production volumes from the Novo Acquisition, we expect Earthstone’s near-term production levels to surpass 135,000 barrels of oil equivalent per day (“Boepd”). Further, we anticipate Free Cash Flow to increase significantly compared to standalone Earthstone as we have added substantial producing assets but are not increasing capital expenditures. The addition of approximately 200 high-quality, low breakeven locations deepens our drilling inventory and with our flat rig count, extends our inventory life significantly to over a decade. We believe the benefits of continued consolidation are very compelling, and we strongly believe this is a value-creating transaction for Earthstone. We are also pleased that Northern recognized the value of these assets and chose to participate in this highly accretive transaction.”

Novo Asset Highlights (Net to Earthstone)

  • Recent production of approximately 38,000 Boepd (37% oil, 66% liquids) from 114 wells
  • $912 million Proved Developed (“PD”) PV-10 and PD reserves of approximately 73.9 million barrels of oil equivalent (“MMBoe”)(1)
  • 21 gross operated wells waiting on completion
  • Estimated $360-380 million of next twelve months (“NTM”) Adjusted EBITDAX(2)(3)
  • Approximately 11,300 net acres (99% operated, 57% working interest, 86% held by production) in the core of the Delaware Basin in Eddy County, New Mexico, and Culberson County, Texas
  • High-return drilling inventory with ~200 gross operated locations and with average breakeven below $40 barrel of oil (“Bbl”)(4)

Novo Acquisition Highlights

  • Attractive Financial Accretion: Purchase price implies 2.7x NTM Adjusted EBITDAX and approximately a 30% NTM unlevered Free Cash Flow yield. The transaction is accretive to Earthstone across key financial metrics, providing an estimated increase to 2024E Adjusted EBITDAX of more than 20% and an estimated increase to 2024E Free Cash Flow of more than 60%(3)(5).
  • Enhanced Scale & Synergy: Highly complementary acreage and regional expertise supports greater capital and operational efficiency, plus increased and sustainable Free Cash Flow generation.
  • Adds High-Quality Inventory: Strengthens deep inventory with ~200 high-return locations, with average breakeven below $40/Bbl and de-risked gross locations across multiple benches that will immediately receive an allocation of capital. Extends inventory life to approximately 13 years.
  • Creates a Stronger Earthstone: Transaction significantly strengthens operational and financial performance, better positions Earthstone as a Permian consolidator, and accelerates potential for meaningful shareholder returns.

Earthstone intends to maintain its five operated drilling rigs post-closing. Given that Novo’s inventory immediately competes for capital, Earthstone intends to move one of its two drilling rigs currently operating in the Midland Basin to the Delaware Basin to focus on the Novo assets. The net result will be Earthstone having four rigs operating in the Delaware Basin and one in the Midland Basin post-closing. The Novo Acquisition and revised development plan continue Earthstone’s evolution over the past several years, with its drilling inventory and development program now heavily weighted towards the highly economic northern Delaware Basin assets.