Houston-based Crescent Energy Co. has agreed to tie-up with cross-town rival SilverBow Resources Inc. to create one of the largest exploration and production companies in the Eagle Ford Shale of Texas, loaded with natural gas, liquids and oil opportunities.
The estimated $2.1 billion transaction, announced Thursday, comes about a month after activist investor Kimmeridge Energy Management Co. LLC withdrew its contested takeover of SilverBow.
The combination among like-minded explorers would elevate Crescent to the top tier of Eagle Ford producers, second only to EOG Resources Inc. Pro forma output for 2024 is estimated at roughly 250,000 boe/d, weighted 44% to natural gas, 39% to oil and 17% to natural gas liquids.
“We’re both oil-weighted in terms of the drilling we’re doing today and the future opportunity, but we love adding even more high quality, gas-weighted locations to be opportunistic from a capital allocation perspective,” Crescent CEO David Rockecharlie said.
SilverBow earlier this year reduced its natural gas output in the Eagle Ford in response to low commodity prices. However, optionality is key, Rockecharlie said.
SilverBow’s portfolio “stacks up really well with ours, which means we would drill their high quality inventory…and we think we’ve got lots more of it than we had prior to this transaction.”
Commodity Price ‘Optionality’
The new inventory “also adds significant optionality to commodity prices, with a valuable mix of both gas- and oil-weighted locations, allowing advantage to capital allocation flexibility through the commodity cycles,” the CEO said.
Will Crescent’s natural gas marketing position be affected by the transaction? And could gas drilling ramp up if prices were to improve?
“It’s all about value with us and, and I think we’ve got a great inventory of locations that are proven,” Rockecharlie said. “We know what we’re going to get and…we don’t make quick moves up when prices get better…
“Fundamentally, the Crescent approach is, when prices are going up, that creates a lot more free cash flow, and that should be for the benefit of the shareholders. So we wouldn’t be adding rigs, but we move the allocation of capital around to the highest areas of return, so we love the optionality” that SilverBow’s assets have.
Rockecharlie said, “we try to make sure we get control of our capital. We don’t go out and chase lease expiration, we don’t do exploration, per se…We don’t want to take on assets that have significant challenges getting product to market.”
That said, “we feel great getting invested in more natural gas opportunities at these prices. And I think the combined business will have a better marketing position than it does separately.”
SilverBow CEO Sean Woolverton, who joined Rockecharlie on the call, said a few years ago, the company set a strategy to achieve a “balanced commodity mix,” as it was “more weighted to liquids than gas.”
The tie-up with Crescent provides that balance, Woolverton said. In addition, it would provide options to “shift capital between oil and gas, dependent upon the prevailing commodity price. So it just checked a ton of boxes for us…I think the inventory here is remarkable.”
Consolidating In South Texas
Crescent and SilverBow have long been among the most active merger and acquisition (M&A) opportunists in the Eagle Ford. Crescent, which also operates in the Uinta Basin, was formed in late 2021 through the merger of Independence Energy LLC and Contango Oil & Gas Co.
SilverBow most recently padded its South Texas inventory in a deal last year with Chesapeake Energy Corp.
“The combined business has executed 12 Eagle Ford acquisitions over the last three years, totaling more than $4 billion of total transaction value,” Rockecharlie told investors. “Nevertheless, the Eagle Ford remains one of the most fragmented basins in the Lower 48, with substantial opportunity for further growth.”
Woolverton said as the two companies had been “active consolidators,” they had gotten to know each other over the last few years. “More recently, our engagements picked up…As I’ve always said, SilverBow is the biggest cheerleader of consolidation in the basin.”
Woolverton was asked whether SilverBow shareholders, which include Kimmeridge, had been involved in the merger discussions. SilverBow has been scheduled to hold elections for three board members, with the annual meeting now delayed until May 29. SilverBow management had alleged that Kimmeridge was attempting to force a merger with its board picks.
“As you might expect, we’ve had a tremendous amount of dialogue…with our shareholders over time and very much so over the past few weeks. I think David and I are looking forward to the opportunity to further those discussions in the coming weeks ahead. And I’m excited for our shareholders to get to know the Crescent team even more and really give them the insight of what the quality of this transaction is.
“So definitely, as we move forward, folding the SilverBow shareholders into the mix is going to be a discussion,” Woolverton said.
Rockecharlie added, “we want to keep as many investors excited about this combined company as we can…We always have been very active on our side of the equation here and will continue to be so. And I think the combined company investors can expect us to maintain a frequent, active and valuable dialogue.”
If all goes to plan, the transaction could be completed by the end of September. Both boards have unanimously approved the merger. Once completed, the Crescent board would increase to 11 members, with nine representatives from Crescent and two from SilverBow.
The transaction is structured as a cash-election merger. That would allow SilverBow shareholders to trade each common share for 3.125 shares of Crescent. They also have the option to receive all or a portion in cash at a price of $38/share for up to $400 million.
Pro forma, Crescent shareholders would own 69-79% of the combined company, with SilverBow stockholders controlling 21-31%.
Good Price, More Opportunities?
The deal with SilverBow “forms a company with a $6 billion estimated value,” Tudor, Pickering & Holt Inc. (TPH) analysts said in reaction to the merger announcement. SilverBow would add about 220,000 net acres to Crescent’s South Texas portfolio, as well as 1,000 undeveloped gross drilling locations.
“The company expects maintenance to be a four- to five-rig program with $65-100 million of synergies,” via capital and operating expenditure efficiencies by the start of next year. In addition, there is the potential for “further upside,” the TPH team said.
Enverus Intelligence Research’s Andrew Dittmar, principal analyst, also weighed in. He was unsure whether Kimmeridge would make a counteroffer.
Based on a 17% premium to SilverBow’s close on Wednesday, Dittmar said, “it appears that it would be challenging for Kimmeridge to make a counterproposal that would be more attractive to SilverBow.”
Similar to Crescent’s earlier acquisitions in the Eagle Ford, the SilverBow combination appears to have been “priced essentially at the value of current production, with little or nothing paid for the undeveloped inventory,” Dittmar noted. “That has been a common theme in Eagle Ford M&A, where deals lack the high prices paid but also the quality seen in Permian inventory.”
The SilverBow natural gas options may hand Crescent opportunities to participate in the Gulf Coast LNG trade, Dittmar said.
“Having more options to shift development” between gas and oil would allow Crescent “to drill oil locations during this period of low gas prices but capture upside should gas prices see their expected improvement,” as more U.S. liquefied natural gas export capacity comes online in the next few years, Dittmar noted.
The “increased scale” near the Texas coast and the “ability to more efficiently source pipeline capacity and coordinate on bottlenecks, should also help the combined company capture value.”
