Shares of the upstream player Bill Barrett Corporation declined about 4% on Dec 5 after the company announced plans to acquire the private energy firm Fifth Creek Energy Company, LLC. Shares of Bill Barrett further plunged 18.71% to eventually close at $4.65 on Dec 6. The company’s plans to issue common stock to repay Fifth Creek’s debt did not find much favor among investors. However, despite the stock dilution, the combined entity is poised for long-term growth on increased scale and synergies.
The acquisition transaction is valued at $649 million based on the closing price of Bill Barrett’s shares on Dec 4. Subject to satisfactory conditions and shareholder’s approval, the transaction is set for closure by the first or second quarter of 2018.
Post the acquisition, the new combined entity will be listed on the exchange under the name “New BBG” with both Bill Barrett and Fifth Creek becoming its subsidiaries. Mr. Scott Woodall, president and CEO of Bill Barrett, will continue to serve at the same positions of the combined entity.
Fifth Creek will receive 100 million shares of the New BBG. Along with that, the transaction value also includes the assumption of $54 million of Fifth Creek’s debt by Bill Barrett.
Additionally, Bill Barrett also announced the issuance of 9.3 million shares to equitize its debt of $50 million of 7% senior notes due 2022. It first announced the issuance of 21 million shares (24.15 million under over-allotment option) to raise $105 million in cash to finance the drilling activities.
Last month, Bill Barrett inked a deal to divest its remaining non-core assets in the Uinta Basin in a bid to transform itself into a Denver-Julesburg (DJ) pure play. The Fifth Creek acquisition strengthens Bill Barrett’s legacy inventory position by adding 81,000 net acres in the DJ Basin along with over 1,000 drilling locations.
The combined entity will possess an acreage position of around 151,100 net acres with 2,865 premium drilling locations. According to the third-quarter results, Fifth Creek produced 2,900 barrels of oil equivalent per day, with 72% of oil. The deal increases Bill Barrett’s oil-weighted production by nearly 14% to and helps the company to add large complementary undeveloped acreage position with strong growth prospects.
Post the acquisition, we expect Bill Barrett to become a DJ centric company with quality inventory which will enable the company to generate higher internal rate of return from drilling programs.
The combined entity is likely to benefit from the increased scale along with financial, commercial and operational synergies. New BBG is also anticipated to gain from leaner cost structure and stronger balance sheet with reduced leverage and higher expected cash flows and EBITDA.
Preliminary Plans for 2018
Bill Barrett plans to operate three drilling rigs on the combined acreage and expects to produce 11-12 million barrels of oil equivalent with 65% oil in 2018. The company further plans a capex budget of $500-$600 million.
Zacks Rank and Other Stocks to Consider
Headquartered in Denver, Bill Barrett is engaged in the exploration and development of oil and gas in the Rocky Mountain regions of United States. The company delivered better-than-expected results in the third quarter of 2017 on the back of increased production output from top-tier assets in DJ basin, with 33% sequential rise in higher margin oil volumes and lower-than-expected capex. The company expects the momentum to continue on the back of synergistic acquisition and strong well performance in DJ basin.
A few other top-ranked stocks in the same industry are Northern Oil and Gas, Inc. (NOG - Free Report) , Denbury Resources, Inc. (DNR - Free Report) and Rice Midstream Partners LP . While Northern Oil & Gas sports a Zacks Rank #1(Strong Buy), Denbury Resources and Rice Midstream carry a Zacks Rank #2 each. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northern Oil and Gas delivered an average positive earnings surprise of 175% in the trailing four quarters.
Denbury Resources posted an average positive earnings surprise of 125% in the trailing four quarters.
Rice Midstream delivered an average positive earnings surprise of 35.25% in the trailing four quarters.
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