Earthstone Energy Adds Third Core With Permian Debut

Earthstone Energy Inc. (NYSE: ESTE) is making its debut in the Permian Basin after a busy year of deal making in other major shale plays.

Earthstone said Dec. 17 it will acquire Lynden Energy Corp. through an all-stock transaction valued at about $67.2 million, based on its Dec. 16 closing price. Lynden, headquartered in Vancouver, British Columbia, has 14,765 gross (5,883 net) acres in core Midland Basin counties.

Through the acquisition, The Woodlands, Texas-based company will add another core drilling area to its asset portfolio which currently includes Bakken and Eagle Ford acreage.

Frank A. Lodzinski, president and CEO of Earthstone, said in a statement buying Lynden falls in line with the company’s strategy of gaining exposure to premium plays with “low cost structures and compelling economics.”

The ‘Pivotal’ Deal

Lynden's acreage is located in Glasscock, Midland, Martin and Howard counties, Texas. The properties have more than 150 proved gross vertical Wolfberry locations, with potential for 50 gross horizontal Wolfcamp A and B wells.

The company also has additional acreage in a single contiguous lease on the eastern shelf of the Permian Basin covering 104,000 gross (52,000 net) acres in Coke, Mitchell and Sterling counties, Texas.

Daily production is about 1,450 barrels of oil equivalent per day (boe/d), of which 53% is oil and 77% is liquids.

CrownQuest Operating LLC, based in Midland, Texas, is the operator of most of Lynden's assets, according to the release.

Earthstone's existing senior management team will lead the combined company.

"While the transaction puts the company in a new basin, rest assured that our management team has significant experience across the entire Permian Basin," Lodzinski said.

The deal also broadens the company's shareholder base, he said.

Earthstone Shares

Under the agreement, Earthstone will issue a total of about 3.7 million shares of its common stock to Lynden stockholders. The shares will represent about 21% of Earthstone's outstanding stock following closing, the release said.

Following the transaction, stockholders of Earthstone will own 79% of the combined company on a fully diluted basis. Lynden stockholders will own the remaining 21%.

Earthstone plans to refinance all of Lynden's debt under its secured revolving credit facility. Lynden has US$37.2 million of borrowings under its revolving credit facility.

Earthstone expects a new borrowing base will be established at closing of the transaction.

As of Sept. 30, the combined company would have had US$49.3 million in cash on hand and US$48.3 million drawn under a borrowing base of US$117.5 million, according to the release.

SunTrust Robinson Humphrey is exclusive financial adviser to Lynden. Vinson & Elkins LLP was the company's U.S. counsel and Owen Bird Law Corp. was its Canadian counsel. Jones & Keller PC was Earthstone's U.S. counsel and Gowling Lafleur Henderson LLP was its Canadian counsel.

Almost a year ago, Earthstone closed another strategic transaction. In December 2014, the company combined with Oak Valley Resources LLC, which is backed by EnCap Investments LP.

Oak Valley, currently owning about 66% of Earthstone's outstanding shares, has executed a written consent in favor of the acquisition of Lynden.

Wheeling And Dealing

So far this year, Earthstone has made an art out of buying small in big plays.

The company is developing Eagle Ford and Austin Chalk acreage that is further prospective for the Upper Eagle Ford, Buda and other formations. The company holds 39,875 gross (19,575 net) operated acres located in Karnes, Gonzales and Fayette counties, Texas.

In June, the company acquired a 50% operated interest in two gross Austin Chalk wells, which hold about 970 gross acres in southern Gonzales County, Texas. The Eagle Ford acreage is 100% HBP, with current gross production of 44 boe/d, all of which was oil.

In June, the company acquired additional acreage in existing Bakken/Three Forks producing units primarily located in the Banks Field of McKenzie County, N.D., for $1.4 million. The small 164-net parcel adds 41 producing wells and 21 wells that are drilling or in the process of being completed.

In the Bakken and Three Forks formations, the company holds about 5,700 net core acres predominately in McKenzie and Dunn counties, N.D.

In an October presentation, Earthstone said it was interested in acquiring another core drilling area in the Bakken, Rockies or Permian.

“The company continues to exercise patience, expecting distressed sale activity to eventually accelerate,” said Dan Katzenberg, senior analyst with Robert W. Baird & Co., in a report.

Looking towards the New Year, Earthstone’s appetite for deals doesn’t seem to be close to satisfied.

"We intend to expand our presence in West Texas and pursue operated properties and acreage as our management team has done in each of our four prior public companies," Lodzinski said Dec. 17.

Contact the author, Emily Moser, emoser@hartenergy.com.