Far from the madding crowd in the Permian Basin and Eagle Ford Shale, SM Energy Co. and Northern Oil and Gas Inc. (NOG) on Thursday snapped up a package of assets in Utah’s Uinta Basin for $2.55 billion.
The transaction is with one of the biggest basin players, XCL Resources Inc., sponsored by private equities (PE) EnCap Investments LP and Rice Investment Group.
Denver-based SM, which would operate the assets, agreed to pay $2.04 billion net after selling Minneapolis-based NOG a 20% stake for $510 million.
"Our differentiated technical team has again demonstrated what sets us apart, having identified a unique opportunity to add top-tier assets with significant upside for a reasonable multiple,” SM CEO Herb Vogel said. “We believe that this transaction checks the boxes for our acquisition criteria.”
‘Resource Upside’
The transaction, set to be completed in September, would give SM another 37,200 net acres, increasing core acreage by 14%. Net production would increase by about 43,000 boe/d. Net proved reserves would climb by around 18%.
Of Uinta’s natural gas resources, SM executives said the associated gas from the oil production “is rich and processed” for natural gas liquids (NGL) extraction. The NGLs add “value at local processing plants.”
In addition, the Uinta’s “residue gas sometimes receives a premium to Henry Hub.”
Notably, XCL last year partnered with Crusoe Energy Systems LLC to turn an estimated 6 MMcf/d of excess natural gas emissions in the Uinta into electricity. Using digital flare mitigation, the emissions are going to be used to power modular data centers.
The “resource upside” in the Uinta would be driven by SM’s “technical expertise,” executives said. “The Uinta Basin has stacked pay potential and high oil content that combine to result in top-tier well performance and inventory with upside. The company's track record in full stack co-development offers the potential to drive differential value across as many as 17 benches.”
In addition, SM’s Uinta production should compete with the Permian holdings in West Texas because of “lower operating costs and sufficient contracted transportation capacity.”
NOG would gain about 9,300 net acres. Executives cited the “substantial return upside from increased lateral lengths (extending to three-miles) and cost savings from an integrated co-owned sand mine facility scheduled to come online within 12 months.”
‘Most Accretive’ In NOG’s History
“The Uinta Basin has emerged as one of the best and fastest growing oil resources in the United States, and SM has a track record as one of our best and most responsible operators,” NOG CEO Nick O’Grady said. “We look forward to working with them for many years to come. We believe this transaction will be the most accretive in our history, benefiting per share net profit and free cash flow both immediately and over time.”
SM and NOG would join several big exploration and production (E&P) companies now working in the Uinta, including Denver-based Ovintiv Inc. Houston-based Crescent Energy Co., which recently agreed to buy Eagle Ford player SilverBow Resources Inc., also develops oil and gas in the Uinta.
XCL’s partnership with EnCap began in 2018. Since then, the PE giant has provided most of XCL’s financial backing for E&P investments. Rice Investment Group also became a “key investor and strategic partner” in 2018. The partnership formed through Rice Energy Inc., “where founding members of XCL migrated” following the sale in 2017 to EQT Corp., XCL noted. EQT, helmed by Toby Rice, today is the nation’s largest natural gas producer.
An Outlier?
Enverus Intelligence Researcher’s Andrew Dittmar, principal analyst, weighed in on the deal. He said it was a bit different as many recent mergers have been for Permian Basin and Eagle Ford assets.
“Most companies have sought acquisitions in basins where they currently operate because of the security that comes with already being familiar with the play and, critically, the ability to capture operational synergies from combining lands,” Dittmar said.
“It has been more unusual to see an E&P in this market enter a new basin, making SM a bit of an outlier.”
However, with the Permian “increasingly consolidated and prices high, it makes sense SM would look elsewhere to find additional inventory. The Eagle Ford is more fragmented than the Permian, but high-quality inventory is largely held by big public companies, and SM could get access to a bigger runway of lower breakeven inventory by looking to the Uinta.”
Another “relatively unique” feature of the Uinta becoming an attractive target could be the Federal Trade Commission’s “scrutiny of deals” in recent months, Dittmar noted.
“Concerns about having the deal blocked by regulators may have lessened interest from incumbent players like Ovintiv and made the asset more attractive to new entrants.”
The “strategic rationale for a pivot into the Uinta is sound,” Dittmar said. However, explaining it to SM investors more familiar with the Permian and Eagle Ford may take some work.
Still, adding inventory remains a key focus of most E&P deals – and the Uinta has a lot of drilling inventory available, Dittmar noted.
Siebert Williams Shank analysts also said the transaction benefits SM, “given it provides critical scale in an emerging oil basin with competitive economics to its current inventory…Further, the deal elevates SM closer to mid-cap status,” with the enterprise value increasing by 31% to $8.7 billion.
