By Mariona Planella Boix, Ismael Fathy Martínez, Pau Rodríguez Coll, Yair Trachtenberg (ESADE), Tim Bamberger & Affan Ahmed (King’s College London)
Overview of the deal
Acquirer: Pioneer Natural Resources Company
Target: Doublepoint Energy LLC
Implied Equity Value: N/A
Total Transaction Size: $6.4B
Closed date: 01/04/2021
Target advisor: JP Morgan
In the deal, Pioneer will issue approximately 27.2 million shares of common stock and $1 billion in cash. Current Pioneer shareholders will own approximately 89% of the merged company after closure while existing DoublePoint shareholders will own approximately 11%. Pioneer plans to finance the cash portion of the purchase price through a combination of cash-on-hand and existing borrowing capacity under its revolving credit facility. The transaction is structured as the acquisition by a Pioneer subsidiary of 100% of the limited liability company interests of DoublePoint’s wholly-owned subsidiary, Double Eagle III Midco 1 LLC.
“DoublePoint has amassed an impressive, high-quality footprint in the Midland Basin, comprising tier one acreage adjacent to Pioneer’s leading position. We are pleased with their decision to become long-term partners with Pioneer in a transaction that will complement our unmatched position in the core of the Permian Basin. ” - Scott D. Sheffield, CEO (Pioneer)
Company Details: (Acquirer - Pioneer Natural Resources Company)
Pioneer Natural Resources is an American energy company, which engages in hydrocarbon exploration, with a focus on shale gas extraction.
Founded in 1997, headquartered in Irving, Texas (USA)
CEO: Scott D. Sheffield
Number of employees: 2,323 (2019)
Market Cap: $32.96B (as of 01/04/2021)
LTM Revenue: $7.07B
LTM EBITDA: $1.92B
LTM EV/Revenue: 4.9x
LTM EV/EBITDA: 18.1x
Company Details: (Target - DoublePoint Energy)
DoublePoint Energy LLC is a Fort Worth, Texas-based upstream oil and gas company. It was formed in 2018 by the combination of the Double Eagle team in partnership with FourPoint Energy (joint venture). DoublePoint's owners include Apollo Global Management, Blackstone Group's GSO Capital Partners, Magnetar Capital, and Quantum Energy Partners.
Founded in 2018, headquartered in Fort Worth, Texas (USA)
CEO: Cody Campbell and John Sellers
Number of employees: Undisclosed
Market Cap: N/A (privately held)
Projections and Assumptions
By the end of the June quarter, the company expects production from the acquired acres to reach 100,000 barrels of oil equivalent per day. Pioneer Natural had previously increased daily production potential to 558 thousand barrels of oil equivalent with the Parsley Energy acquisition. Pioneer Natural would become one of the largest producers in the Permian Basin, the United States' most prolific oil reserve, since acquiring its Midland Basin neighbor. Pioneer Natural will add 97,000 high-quality net contiguous acres to its current asset base as a result of the bolt-on acquisition. The acquisition would increase the acquirer's overall basin holdings to more than 1 million net acres. Its shares have gained 87%, underperforming the industry’s 123.3% rally in the past six months.
Pioneer’s acquisition of DoublePoint is a strategic transaction that stems from the pursuit to further consolidate the company’s position in the Permian Basin which accounts for approximately 40% of all oil production in the United States. DoublePoint’s high-quality footprint in the Midland Basin will complement Pioneer’s unmatched position in the core of the Permian Basin leading to robust top-and bottom-line synergies in the long run. Firstly, the transaction is expected to yield cost-saving synergies of roughly $175 million per year through an overall enhancement in operating efficiency, enabling reductions in both G&A and interest expenses of up to $1 billion over 10 years.
These cost-saving synergies are crucial and in line with Pioneer’s priority of boosting their return on capital and overall value creation for their shareholders in the long run. This was reinforced by Scott Sheffield, Pioneer’s CEO, who declared “Pioneer will incorporate these assets into our investment model, migrating the assets from significant production growth to a free cash flow model, moderating growth for the US shale industry and generating significant value for our shareholders”. Ultimately, both the accretion and incorporation of additional assets to the free cash flow model following the acquisition is expected to boost the per share variable dividends from 2022 onwards.
Risks and Uncertainties
A significant decrease in demand caused by the COVID-19 pandemic (c. -9% YoY) and the oil price war between Saudi Arabia and Russia had a massive impact on the oil and gas industry last year. The combination of the two factors led the price of the Brent crude oil benchmark to collapse by more than 70% between January and April 2020 and created undesirable volatility in the market. This price volatility could compromise the potential cost savings and synergies of the transaction and put its profitability at risk. Additionally, the nature of the industry poses a serious threat to the environment, both on a local and global basis, contributing to biodiversity loss and releasing gas emissions to the atmosphere, and could be a future constraint.
In addition, the capacity of Pioneer Natural Resources to refocus effectively DoublePoint’s strategy is another uncertainty. The acquirer stated its plans to transition DoublePoint to a moderate-growth and cash flow generating business, focusing on profit over volume growth. Finally, it is important to bear in mind that government approvals are required for companies to operate in the sector, and the combined company could face regulatory changes in the future.
"The combination of Pioneer and DoublePoint is compelling from both a financial and operational standpoint and a natural fit for DoublePoint. This acquisition continues the trend of consolidation in the prolific Permian Basin, combining two complementary footprints in a transaction with both top-and bottom-line synergies." - Geoffrey Strong, Senior Partner and Co-Head of Infrastructure and Natural Resources (Apollo)