Denbury Adds Eagle Ford Core With $1.7 Billion Penn Virginia Merger

Denbury Resources Inc. (NYSE: DNR) said Oct. 28 it will acquire Penn Virginia Corp. (NASDAQ: PVAC), a Houston-based operator in the Eagle Ford Shale, in a cash-and-stock transaction valued at about $1.7 billion, which includes associated debt.

The acquisition of Penn Virginia is expected to add a new core area in the oil window of the Eagle Ford Shale to Denbury’s portfolio. The Plano, Texas-based company, which focuses on CO₂ EOR, currently operates in two key areas: the Gulf Coast and Rocky Mountain regions

Chris Kendall, Denbury’s president and CEO, said the transaction marks a “defining moment for Denbury.”

“Through this combination, we plan to focus Denbury’s significant enhanced oil recovery expertise on the prolific Eagle Ford shale, positioning us at the forefront of this exciting new arena for EOR,” Kendall said in a statement. “Denbury’s passion for improved oil recovery and our deep technical knowledge give us a strong advantage on this new frontier.”

Further, Kendall believes Penn Virginia’s Eagle Ford assets will add many years of high value, low-breakeven development to Denbury’s portfolio and he expects the combined company will generate positive free cash flow immediately.

As part of the merger agreement, Denbury will acquire Penn Virginia through the issuance of 12.4 shares of Denbury common stock and a $400 million cash payment. Denbury intends to finance the transaction with cash on hand and debt financings comprised of a new $1.2 billion credit facility and a $400 million senior secured second lien.

Analysts with Capital One Securities estimate Denbury will acquire Penn Virginia for roughly $2,700 per acre, after ascribing about $1.45 billion of value for existing proved developed producing based on discounted cash flow analysis at $65/$2.75 flat implying $66,000 per flowing barrel of oil equivalent per day (boe/d).

“Overall positive transaction that provides Denbury with additional high-margin properties at an attractive acquisition price,” the Capital One analysts said in a research note on Oct. 29.

The firm noted the median per-acre price tag of major Eagle Ford transactions of the past two years implies about $1,300 per acre.

Penn Virginia recently completed its transformation into a pure-play Eagle Ford Shale operator with the sale of the company’s Oklahoma properties in July.

The company holds roughly 84,000 net acres in the Eagle Ford across Gonzales, Lavaca and Dewitt counties in South Texas, which is about 92% HBP and 99% operated by Penn Virginia. Second-quarter net production from the properties was about 22,200 boe/d (74% oil).

Capital One analysts forecast about $35/boe cash margin in 2019 for Penn Virginia, which the firm noted was among the top 10% in its coverage.

John A. Brooks, president and CEO of Penn Virginia, said he believes a merger with Denbury Resources maximizes value for the company’s shareholders and represents an ideal outcome for Penn Virginia and all of its stakeholders.

“Applying Denbury’s demonstrated expertise in enhanced oil recovery to the oil-rich resources of our large, contiguous Eagle Ford acreage provides our shareholders the opportunity to maximize value acceleration of Penn Virginia’s South Texas unconventional oil shale assets,” Brooks said in a statement.

The deal’s $1.7 billion price tag equates to $79.80 per share, an 18% premium to the closing price of Penn Virginia stock on Oct. 26, according to analysts with Capital One.

Combined, Denbury and Penn Virginia are expected to have a $6 billion enterprise value, as of Oct. 26. The second-quarter 2018 production of the combined company totals 84,000 boe/d and its proved reserves at year-end 2017 was about 343 million boe.

The new debt financings will replace existing Denbury and Penn Virginia credit facilities and will be used to fund the $400 million cash portion of the acquisition and potentially to retire Penn Virginia’s $200 million second lien.

The merger agreement contains a covenant that upon its closing, Denbury’s board of directors will be expanded from eight directors to ten directors, to include two independent members of Penn Virginia’s board of directors who are mutually agreed upon by both companies.

The companies expect to close the transaction in the first quarter of 2019. Upon closing of the transaction, Denbury stockholders will own about 71% of the combined company, and Penn Virginia shareholders will own roughly 29%.

Guggenheim Securities LLC was lead financial adviser to Denbury. J.P. Morgan Securities LLC also provided financial advice to the company with respect to capital structure and financial aspects of the transaction and provided a financing commitment letter for the new credit facility and second lien bridge loan. Vinson & Elkins LLP provided legal counsel to Denbury.

Penn Virginia’s financial adviser was Jefferies LLC. Skadden, Arps, Slate, Meagher & Flom LLP and Gibson, Dunn & Crutcher LLP acted as legal counsel to Penn Virginia.

Emily Patsy can be reached at epatsy@hartenergy.com.