Centennial, Colgate to merge, creating biggest pure-play Delaware Basin operator

Centennial Resource Development and Colgate Energy Partners agreed to combine in a $3.9 billion cash and stock deal, creating the largest pure-play exploration and production Delaware Basin operator in West Texas/Southeast New Mexico with high-quality, scaled complementary assets, the companies said May 19.

The surviving entity, valued at a total $7 billion, will get a new name and ticker symbol at a later date, the partners said in a statement. It will have 135,000 b/d of equivalent production based on both operators' current volumes.

It will also have roughly 180,000 net acres in the Delaware Basin, which is the western side of the greater Permian Basin, the companies said in a joint statement. The Permian is the US' largest oil reservoir and one of the largest natural gas plays with nearly 5.3 million b/d and 15 Bcf/d of current outputs, respectively, according to S&P Global Commodity Insights.

The "merger of equals" stems from assorted similarities, Centennial CEO Sean Smith said during a conference call to explain the deal.

"We are both focused on the same basin with a largely overlapping footprint," Smith said. "Our ... companies share common cultures and values in respect to operational excellence, shareholder returns [and] ESG."

They also share a "common vision" for the combined company that includes a "strong" balance sheet, a disciplined investment program to generate cash flows and a robust return-of-capital program, he said: "The combination of these ... companies is the best path forward and will create more value together than either company could on a stand-alone basis. Colgate's complementary high-margin assets are a natural fit for Centennial."

Comes amid an M&A lull

The transaction announcement came amid a recent lull in M&A activity which was relatively brisk in 2021 but has since slowed amid higher oil prices. Notable this year was the $6 billion merger announcement of Whiting Petroleum and Oasis Petroleum, both Bakken Shale operators in that North/Dakota play.

The combined business will be headquartered in Midland, while maintaining Centennial's Denver office for the foreseeable future, Smith added.

By the fourth quarter of 2022, production from the combined entity should average 145,000 boe/d, and by Q4 2023, production should be 10% higher still at around 160,000 boe/d, Will Hickey, co-CEO of Colgate, said.

The transaction, which is expected to close in second-half 2022, has been unanimously approved by the boards of both companies.

Under the deal terms, Centennial will exchange $525 million in cash and 269.3 million of its shares valued at $2 billion at the May 18 closing price, and also assume $1.4 billion of Colgate's outstanding debt. At closing, the combined company's net debt/EBITDAX ratio will be about 1.0x -- relatively very low although a common ratio currently among fiscally disciplined E&Ps.

The Permian is currently the most productive US play, and its multiple "stacked" or layered subsurface geological zones is considered to have the most potential for long-life production well into the next decade.

Energy consultancy Rystad Energy predicted May 19 that according to its research, total hydrocarbon production in the Permian Delaware Basin, the top-producing play in the Permian, will hit a record 5.7 million boe/d average in 2022.

"Spurred on by high oil prices and appealing well economics, total production is set to grow by around 990,000 boe/d, almost half of which – 433,000 boe/d – is new oil production," Rystad said.

Colgate has total current production at around 70,000 boe/d and a high-quality acreage position of about 105,000 net leasehold acres and 25,000 net royalty acres in the Delaware, the companies said.

Colgate's Permian locations

Colgate's stakes are focused in Reeves and Ward Counties, Texas and Eddy County, New Mexico. The company has grown through a combination of organic development and strategic acquisitions.

After closing, Centennial's Smith will move to executive chair of the board while Will Hickey and also James Walter, currently Colgate's co-CEOs, will lead the combined company as co-CEOs of Centennial. Matt Garrison, Centennial's current chief operating officer, and George Glyphis, the company's current CFO, will continue in those respective roles post-closing.

"From our ... database we observe that Colgate's average well productivity is accretive (and improving) compared to Centennial's average well productivity that has been mostly steady over the past four years," Wells Fargo analyst Joseph McKay said in a May 19 investor note.

"The scaled entity offers a more compelling Shale 3.0 narrative, in our view," McKay said. "Furthermore, the pro forma market cap around $4 billion pushes the combined entity more into the small/midcap universe of stocks, versus small cap prior, where investors have comparatively fewer options" to both top-tier oil producers and advanced shale exposure.

Upon closing, the combined company will have more than 15 years of drilling inventory, assuming a current drilling pace, the partners said.

"Both operators have established strong financial and operational cultures, and we expect the combined company will be a top-tier, low-cost operator ... able to deliver better margins and shareholder returns," Hickey said.

The merger of Colgate and Centennial is "compelling from a financial, operational and strategic standpoint, Walker said. "Management's significant ownership in the combined company should give investors confidence that long-term value creation will always be our top priority," he added.

At closing, the combined company will have one of the largest management ownership interests of any public E&P company with roughly 12% of pro forma total outstanding shares owned by management. That assures they will be motivated to increase shareholder value, the partners said.