Earthstone Buys Novo Oil & Gas For A Modest Price, Still Implying Significant Upside for Heavily Discounted Vital Energy
The oil and gas M&A boom is in full swing, with Earthstone Energy (NYSE: ESTE) recently having announced it was acquiring Novo Oil & Gas Holdings LLC, a Delaware operator backed by private equity firm Encap, for $1.5B. Northern Oil & Gas (NYSE: NOG) is acquiring a 33% working interest in the asset for $500MM, resulting in a net effective purchase price of $1B for Earthstone, as can be seen below:
This transaction was relatively straightforward compared to other recent oil and gas transactions we’ve covered. For instance, Callon Petroleum’s purchase of Percussion Petroleum assets included the assumption of contingent payments and liabilities, while Ovintiv’s acquisition of Encap Permian assets involved the simultaneous sale of Bakken assets at a significantly below-market price. Both these transactions implied much higher purchase prices than were initially disclosed, and material upside for nearby Vital Energy (NYSE: VTLE).
Earthstone Acquisition and Implications
Earthstone disclosed having bought 38,000 boe/d of production with 37% oil, net of the production attributable to Northern Oil & Gas. It is also assuming significant inventory, including 11,300 net acres, 21 drilled uncompleted wells, and 200 gross drilling locations. These production metrics imply a deal price of $26,316/boe/d:
Earthstone undeniably got a good deal for these assets, with this deal price coming in on the low end of what we’ve seen in recent transactions in the Permian. For instance, we estimate the deal prices for the Ovintiv and Callon transactions were closer to $65,000 and $43,000, respectively. Earthstone is also claiming they are getting significant high-return inventory with an average break-even price of $40/bbl, with significant undeveloped acreage, significantly improving the overall production profile of its assets.
Implications for Vital Energy
Remarkably, even this modestly-priced transaction price implies a significant upside for Vital Energy. It is worth noting that Vital recently acquired Delaware assets from Forge Energy for $378MM, expanding its footprint into the Delaware basin and significantly increasing its production profile for 2023:
As can be seen above, we estimate that this most recent transaction implies 83% upside for Vital’s assets in a similar deal, despite this lower deal price. In our view, this is reflective of an extremely steep valuation discount for Vital that continues to be priced in by public markets. As U.S E&Ps in the Permian and elsewhere continue to consolidate to take advantage of persistent market valuation dislocations, Vital may benefit significantly.
Important Disclaimer: Opinions expressed herein by the author, Josh Young, are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises owns shares in Vital Energy (NYSE: VTLE) and may buy or sell shares without any further notice.
Short interest in VTLE is 23.78%. Mere whispers of acquiring interests should be enough to initiate some decent short covering, I would think.
what a great acquisition! I think that we're still waiting for the consolidation to continue, wondering when the public market will exhaust all of the private equity deal and start looking at the small cap E&P.