Earthstone Energy to Acquire Warburg-backed Chisholm in Permian Basin

Earthstone Energy Inc. on Dec. 16 agreed to acquire the assets of privately held Permian Basin operator Chisholm Energy Holdings LLC in a cash-and-stock transaction worth over $600 million that marks the independent E&P company’s fifth acquisition within the past 12 months.

“The Chisholm acquisition caps off a series of highly-accretive and value-adding transactions that have dramatically transformed Earthstone during 2021 and further establishes Earthstone as a Permian Basin focused company with increasing scale,” Robert J. Anderson, president and CEO of Earthstone, commented in a company release.

In particular, the acquisition of Chisholm will expand Earthstone’s Permian footprint into the Delaware Basin. The company expects the deal will not only increase its net production and adjusted EBITDAX but also roughly double free cash flow in 2022 versus Earthstone standalone.

Chisholm, majority owned by Warburg Pincus LLC and its affiliates, operates in the northern Delaware Basin with approximately 36,100 net acres and a drilling inventory of 414 gross (237 net) operated identified locations in New Mexico’s Eddy and Lea counties. The company is currently operating a two-rig drilling program, which Earthstone said it plans to maintain, with current net production of about 13,500 boe/d (61% oil, 79% liquids).

As in previous acquisitions, Earthstone is using a mix of cash and equity to acquire Chisholm’s high margin producing assets that generate free cash flow, adding “substantial size and scale while maintaining our balance sheet strength,” Anderson also noted.

The aggregate purchase price of the Chisholm acquisition is approximately $604 million consisting of $340 million in cash at closing, $70 million of deferred cash due over the 12 months after closing and about 19.4 million shares of Earthstone’s Class A common stock valued at $194 million based on its closing share price on Dec. 15.

Warburg Pincus, a current beneficial owner of about 15.1% of Earthstone’s total Class A and Class B common stock, is expected to indirectly receive roughly 13.2 million shares of Class A common stock through its majority ownership of Chisholm. Adjusted for the equity consideration expected to be issued, Warburg Pincus’s beneficial ownership of Earthstone’s total Class A and Class B common stock will be increased to approximately 24.7%, according to the company release. 

Earthstone plans to fund the cash portion of consideration with cash on hand and borrowings under its senior secured revolving credit facility. The company said it also obtained commitments from a group of existing lenders to increase the borrowing base and elected commitments under its credit facility to $825 million from $650 million upon closing.

Based in The Woodlands, Texas, Earthstone Energy is a small-cap, Permian-focused producer with about 101,300 net acres in the Midland Basin, according to its most recently published investor presentation.

Over the past six years, Earthstone has utilized M&A of small operators in pursuit of its consolidation strategy, including acquisitions of Independence Resource Management LLC and Tracker Resource Development III LLC, both of which closed in 2021 and added to Earthstone’s Midland Basin position. More recently, the company closed in early November a bolt-on acquisition in the Midland Basin worth approximately $73.2 million in cash and stock.

Also, earlier this year, Earthstone closed an acquisition in the Eagle Ford Shale where the company also operates on a smaller scale.

“When this acquisition is combined with the previous four acquisitions completed in 2021,” Anderson continued of the Chisholm acquisition, “we will have increased our Permian Basin net acreage footprint by approximately 400%, almost tripled our daily production rate and meaningfully increased free cash flow generation capacity.”

In total, Earthstone expects the Chisholm acquisition to increase its Permian Basin acreage footprint by over 35% to roughly 138,000 net acres. Net production is expected to also grow by roughly 39% as well as adjusted EBITDAX by 49%.

Pro forma, Earthstone forecasts 2022 preliminari production of 44,000-48,00 boe/d (53% oil, 75% liquids) and $550 million-$580 million of adjusted EBITDAX.

“Additionally, the significant size of this transaction increases our scale materially and positions us to build on our corporate and field level operating efficiencies and drive additional cost savings,” Anderson said.

Wells Fargo Securities LLC is exclusive financial adviser to Earthstone. Jefferies LLC is serving as exclusive financial adviser to Chisholm. Legal advisers included Haynes and Boone LLP and Jones & Keller P.C. for Earthstone, and Kirkland & Ellis LLP for Chisholm.