On August 31 Ring Energy Inc. purchased privately-held Stronghold Energy, adding operations which are mainly situated in Crane County, Texas, in the Permian Basin's Central Basin Platform.
According to a September 1 Ring Energy release, this transaction fully complements the conventional-focused Central Basin Platform and Northwest Shelf asset positions in the Permian Basin.
The majority owned by Warburg Pincus LLC, Stronghold's operations are concentrated on the development of about 37,000 net acres situated mainly in Crane County. The company was established in 2017 by father and son duo Steve and Caleb Weatherl.
In July Ring Energy entered into an agreement to buy Stronghold Energy II Operating LLC and Stronghold Energy II Royalties LP for $200 million in cash at closing and $230 million in Ring equity based on a 20-day volume weighted average price. Consideration also involved a $15 million deferred cash payment due six months after closing and $20 million of existing Stronghold hedge liability increasing the total transaction value to $465 million.
The cash portion of the consideration was funded mainly from borrowings under a new fully committed revolving credit facility endorsed by Truist Securities, Citizens Bank NA, KeyBanc Capital Markets, and Mizuho Securities.
Stronghold's asset base is almost 99% operated, 99% working interest, and 99% HBP. In July, Ring announced the current net production of Stronghold's asset base was approximately 9,100 boe/d (54% oil, 75% liquids).
McKinney shared that the acquisition further spreads out Ring Energy's commodity mix, essentially improving the company's size and scale and lowering its per barrel operating costs while also bringing meaningful synergies and raising operations optionality on multiple fronts.
The merger of lower per barrel operating costs and a considerably extended inventory of high-margin, capital-efficient development opportunities is anticipated to raise free cash flow, hastening the rate at which the company pays down debt, and improves the leverage metrics.
Thanks to this, the company holds a much stronger position to expand through supplementary acquisitions or enlarge stockholder returns through the potential return of capital opportunities in the future.
All Stronghold's owners now are Ring's largest stockholders, according to the release. Ring's board of directors has been extended from seven to nine directors, adding two members proposed by Stronghold.
The effective date of the transaction was June 1. Raymond James and Truist Securities are financial advisers to Ring, and Piper Sandler & Co. is financial adviser to Stronghold for the transaction. Mizuho Securities compiled a fairness opinion for Ring's board. Jones & Keller, P.C. provided legal counsel to Ring and Kirkland & Ellis LLP provided legal counsel to Stronghold.
On the Central Basin Platform, Ring Energy, Inc. is targeting the San Andres formation. The San Andres is a high oil-saturated “conventional shallow non-contiguous carbonate reservoir” at approximately 5,000' and is primarily an oil-bearing formation (approximately 96% oil) that has been drilled and produced for over 90 years. Of the over 30 billion barrels produced from the Permian Basin approximately 40%, or 12 billion barrels, came from the San Andres reservoir.
