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Triple Advantage Vital Energy's $1 Billion M&A Enhances Permian Portfolio, Cash Flow

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Vital Energy, focused on the Permian Basin, plans quick debt reduction after securing $1.165 billion in deals, adding key Midland and Delaware basin inventory.

The sellers involved in this transaction:

Henry Energy LP, Henry Resources LP, and Moriah Henry Energy Partners LLC;
Tall City Property Holdings III LLC, which is fortified by the eminent private equity firm Warburg Pincus;
Maple Energy Holdings LLC, associated with the esteemed private equity entity, Riverstone Holdings LLC.

Vital Energy announced its plans to acquire assets from three distinguished private producers in the Permian Basin. This transaction, a meticulous amalgamation of cash and stock, effectively doubles the equity of Vital Energy, a company with a market capitalization nearing $1 billion.

With an investment valuing $1.165 billion, Vital Energy has judiciously secured assets from three notable E&Ps in the Midland and Delaware basins, marking a significant advancement in its portfolio enhancement strategy. Industry analysts perceive these transactions as pivotal, allowing Vital Energy to augment its inventory considerably.

Vital Energy has consolidated some of the scarce remaining private opportunities in the Permian region.

Significant Acquisitions

In April, a pivotal $214 million acquisition of Driftwood Energy Operating LLC was finalized, adding Midland acreage.
In June, a noteworthy $378 million deal led to the acquisition of 70% of EnCap Investment Partners’ Forge Energy II.

These deals will leave Vital Energy with approximately 70,000 net acres in the Delaware.

Numerous analysts concur that while the deal does dilute shareholder equity, it remains accretive to free cash flow yield. The company itself projects a noteworthy increase in free cash flow by approximately 90% by 2024, reflecting a positive fiscal trajectory.

The newly acquired leasehold harmonizes effectively with Vital Energy’s preceding acquisitions in 2023. These acquisitions result in a substantial contiguous acreage position in Reeves County, Texas, further bolstering Vital Energy’s strategic foothold.

Transaction Structuring

The company structures the transactions involving $569 million in equity, $296 million of convertible preferred securities, and about $300 million in cash, along with the allocation of shares and senior notes for debt reduction.

Equity Research

Gabriele Sorbara from Siebert Williams Shank & Co. LLC conducts equity research, detailing the components and rationalizing the transaction value, outlining the reasonable premium, and estimated combined PDP value in a comprehensive report.

Post-Report Release

Vital Energy finalizes the acquisition of approximately 115 net locations at an estimated cost of $500,000 per well and integrates the acquired assets, planning a 50% reduction in activity on these assets.

Operational Adjustment

Vital Energy, aligning with the acquired assets and new inventory, adjusts its operational strategies and execution plans to optimize value and achieve its long-term objectives, considering the insights from the analyses and the identified opportunities in acquisitions.

This time-lapse overview illustrates the intricate and phased approach by Vital Energy in maneuvering through strategic acquisitions, analytical assessments, operational integrations, and long-term strategic executions.

A Glimpse into Vital Energy’s Strategy

Vital Energy has spent $1.757 billion on mergers and acquisitions this year, including recent ones. The company, guided by Pigott and its management team, is aggressively working on reducing its debt.

They project a 90% increase in free cash flow by 2024, assuming $80 oil. To secure returns and meet leverage targets, they’ve hedged volumes linked to these deals. The transactions will fast-track debt reduction and create scale and synergies, especially in the Permian.

By the end of 2024, Pigott expects to lower the company’s leverage to less than 1x at $80 oil, making access to capital more attractive and initiating a competitive cash return program for shareholders. Alongside the deal closures, Vital Energy’s borrowing base in its credit facility will see a rise to $1.5 billion.

The acquisitions are adding over 50,000 net acres and 35,000 boe/d, with oil making up half.

Once the deals close, the company will hold 250,000 net acres and expects 2024 production to average 112,000 boe/d, marking a 25% increase compared to if the company remained standalone.

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Diamondback's Viper Energy Acquires $1 Billion in Royalty Interests in the Permian Basin

Viper Energy's deal, comprised of cash and equity, secures an additional 2,800 net royalty acres in the Midland Basin and 1,800 in the Delaware Basin. Viper Energy Partners LP, a Diamondback Energy Inc. subsidiary, has inked a deal to acquire mineral and royalty interests in the Permian Basin. The deal, valued at around $1 billion, is with Warwick Capital Partners and GRP Energy Capital. Viper was established by Diamondback with the purpose of owning, purchasing, and capitalizing on oil and natural gas assets in North America, specifically targeting mineral and royalty interests.

In a recent announcement, energy services firm Baker Hughes stated that U.S. energy companies have decreased the number of operating oil and gas rigs for the third successive week. This development marks the first such consistent reduction since early September. As of October 6, the count for oil and gas rigs, considered a precursor to future production levels, has seen a decline by four, positioning it at 619. This is the lowest figure recorded since February of the preceding year. The overall rig count has decreased by 143 or 19% when compared to last year's statistics.

The United States government has announced a significant investment of $7.3 billion from the 2022 Inflation Reduction Act (IRA) to support clean energy initiatives led by rural electric cooperatives. These projects aim to reduce energy costs, enhance reliability, and promote sustainability for rural communities, where energy costs tend to be higher than in urban areas. This investment marks a substantial effort toward decarbonizing rural America while supporting job creation and infrastructure improvements.

The U.S. oil and natural gas rig count experienced a slight decline, falling by four to a total of 633 rigs for the week ending August 21. Despite this modest drop, industry analysts have noted a surprising resilience in both oil supply and natural gas prices as the year progresses, suggesting that the market may be more robust than previously anticipated.

Investors remain strongly bearish on petroleum prices, even as confidence grows that the U.S. Federal Reserve will cut interest rates to boost consumer and business spending. Last week, fund managers returned to selling oil futures and options, as the brief rally from the previous week quickly lost steam and negative sentiment took hold once again. Hedge funds and other money managers offloaded 48 million barrels across the six major futures and options contracts in the week ending August 20. This marks the sixth time in seven weeks that funds have been sellers, reducing their positions by a staggering 346 million barrels since early July, based on data from exchanges and regulators.

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