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Triple Advantage Vital Energy's $1 Billion M&A Enhances Permian Portfolio, Cash Flow10/11/2023
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.
- 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.
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.
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.
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.
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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