Penn Virginia to acquire Lonestar Resources in bid for expanded Eagle Ford Shale position

Small public Eagle Ford Shale operator Penn Virginia Corp. agreed July 12 to acquire Lonestar Resources, another small Eagle Ford public operator for $370 million – further consolidating the upstream oil and gas industry which is pushing for scale in a competitive operating landscape amid volatile commodity prices.

The all-stock transaction complements Penn Virginia's existing assets, increases its production of about 25,000 boe/d in the South Texas play by 50% and also raises inventory locations about 50% to 750 gross, the company said in a statement.

Moreover, additional scale and a strong financial position sets up Penn Virginia for future potential consolidation, it added. Lonestar completed restructuring last December.

"This is an exciting time for Penn Virginia as we expand our Eagle Ford footprint with the high-quality assets of Lonestar," Darrin Henke, the acquirer's president and CEO said. "This transaction further solidifies [our] position as a premier Eagle Ford operator and provides additional scale and synergies."

The acquisition, which is expected to close in second-half 2021, has been unanimously approved by both operators' boards. Shareholders representing about 80% of Lonestar and 60% of Penn Virginia have inked binding support agreements committing them to vote in favor of the acquisition.

Under the deal's terms, Lonestar shareholders will receive 0.51 share of Penn Virginia common stock for each Lonestar common share.

Purchase price is 17% premium

"The consideration comprises 5.9 million shares of Penn Virginia common stock and assumption of $236 million of net debt," KeyBanc analyst Leo Mariani said in a July 12 investor note, adding the purchase price equates to a 17% premium to Lonestar's Friday closing price of $10/share.

The transaction would maintain Penn Virginia's strong balance sheet, with combined net debt/adjusted EBITDAX of less than 1.6x as of June 30, 2021 and a target of 1x expected to be by early 2022.

As a reference, bank lenders in recent years have required no more than about 3.5x net debt/EBITDA or EBITDAX, although most large public E&Ps are now sizably below that level and most operators aim for a maximum of 2x, with many companies now below 1x.

Industry-wide Eagle Ford oil production in the Eagle Ford currently totals about 1.1 million b/d, and the play also produces 4.8 Bcf/d of natural gas, according to S&P Global Platts Analytics.

At its peak in early 2015, the Eagle Ford was producing close to 1.7 million b/d of oil and 7.5 Bcf/d of gas, Platts Analytics historical figures show.

The Eagle Ford Shale has seen the least of the $32.7 billion in merger and acquisition transactions in 2021 year to date, accounting for only 5% of total deal value, according to S&P Global Platts Analytics' June Southeast Oil & Gas Production Monitor.

Instead, the Permian Basin of West Texas/New Mexico – the largest US oil basin with about 4.5 million of oil output currently – has accounted for about 50% of deals.