PDC Energy (PDCE - Free Report) is all set to acquire smaller rival SRC Energy for about $1.7 billion. The headline price includes SRC Energy’s estimated debt load worth $685 million.
The all-stock transaction bid will be dealt at a fixed exchange ratio of 0.158 PDC Energy shares for each share of SRC Energy’s stock. This represents a 4% discount to SRC Energy’s closing share price on Aug 23, thus valuing the asset at $3.99 a share. Post the announcement of the deal, shares of PDC Energy and SRC Energy rallied 16.8% and 11.8%, respectively. After the culmination of the transaction later this year, current stockholders of PDC Energy will own 62% stake in the combined entity while the rest will be held by the SRC shareholders.
Last year, both companies had a collective strength of 700 employees. With this deal, however, the workforce is expected to be trimmed to 500.
PDC Energy will emerge as the second-largest oil producer in the Denver-Julesburg Basin behind Houston-based Occidental Petroleum (OXY - Free Report) at the top to go with its existing Permian acreage, if this deal gets through.
The consolidated company is anticipated to incur G&A savings of $40 million in 2020 and $50 million in 2021.
Following the merger, PDC Energy has plans to dig wells across a sprawling area of 182,000 acres, mostly in the gas fields of Watternberg, CO. This comes in addition to its existing 36,000 net acres in the oil-rich Permian Delaware Basin. The integrated entity — projected to produce around 200,000 barrels of oil equivalent per day by this year end — aims to use one and two drilling rigs on the fields owned by SRC Energy and PDC Energy, respectively, at an expenditure amounting to $700-$800 million. Both companies have a backlog of drilling contracts in Colorado that would continue through 2020 and 2021.
The Denver-based company, engaged in acquiring, developing and exploring crude oil, natural gas and natural gas liquids, is expected to have a strong balance sheet following a pro forma leverage ratio of 1.3x on June 30, 2019 and an estimated leverage ratio of 1.0x for the end of the next year. Moreover, its capital expenses are forecast to fall, resulting in an enhanced credit scenario.
The acquisition of SRC Energy, which is estimated to add roughly 10 years of inventory, is likely to contribute around $800 million to PDC Energy’s free cash flow through 2021. Further, the strategic merger will see PDC Energy raising its stock buyback program to $525 million from $200 million while utilizing approximately 50% of its estimated free cash flow of about $800 million to repurchase shares till 2021 end.
Zacks Rank & Key Pick
PDC Energy carries a Zacks Rank #5 (Strong Sell).
A better-ranked player in the energy space is Enbridge Inc. (ENB - Free Report) , holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enbridge’s earnings beat the Zacks Consensus Estimate in three of the last four quarters.
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