Earthstone Energy Inc. continued its buying spree on Oct. 4 with a bolt-on acquisition in the Midland Basin worth approximately $73.2 million in cash and stock.

“This transaction will be our fourth acquisition this year as we continue to advance our consolidation strategy and enhance our Midland Basin footprint with additional scale,” Robert J. Anderson, president and CEO of Earthstone, commented in a release by The Woodlands, Texas-based company.

Earthstone Energy is a small-cap, Permian-focused producer with 29,100 net acres in the Midland Basin and an additional 14,500 net acres in the Eagle Ford Shale, according to the company website.

Over the past six years, the company 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. The company also completed an acquisition in the Eagle Ford Shale in June.

In its latest acquisition, Earthstone said it agreed to acquire privately held operated assets located in the Midland Basin from two sellers in exchange for $49.2 million in cash and approximately 2.6 million shares of Earthstone Class A common stock.

The stock consideration represents approximately 3% of the total outstanding Class A and Class B common stock on a pro forma basis and is valued at $24 million based on a closing share price of $9.20 on Sept. 30.

Earthstone said it will fund the cash portion of the consideration and fees and expenses with cash on hand and borrowings under its revolving credit facility. As of Aug. 31, and adjusting for the current borrowing base of $650 million, Earthstone had liquidity of approximately $365 million based on the $363.4 million of undrawn borrowing base capacity and $1.2 million in cash.

“The mix of consideration between cash and equity in accordance with our focus on maintaining a strong balance sheet positions us well to continue our consolidation efforts,” Anderson added in the release. “We are pleased to continue to add incremental scale in an accretive manner without sacrificing our balance sheet or free cash flow generation.”

The acquisition will add roughly 4,400 boe/d (26% oil, 52% liquids) of production. The acquired asset base and operations also include projected next 12-month adjusted EBITDAX of approximately $42 million plus associated reserves of approximately 13.3 MMBoe (11% oil, 31% NGL, 58% natural gas).

Additionally, Anderson noted in his statement that the bolt-on acquisition will tack on approximately 10,000 net acres (100% operated; 67% HBP) to Earthstone’s position in Irion County, Texas.

“We expect to benefit from additional operating synergies when production operations are combined with other assets in the area,” he continued. “As we have done in prior acquisitions, we look forward to applying our operating approach to these assets in order to reduce costs and maximize production and cash flows.” 

The bolt-on acquisition is expected to close by the middle of the fourth quarter with an effective date of July 1. Earthstone maintains its target of achieving sub-1.25x leverage by year-end 2021, the release noted.

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