(Bloomberg) — KKR & Co. is building a shale-oil acquisition vehicle with the $5.7 billion combination of two little-known explorers.
The buyout firm’s Independence Energy will merge with Contango Oil & Gas Co. in an all-stock deal that will be used to hunt down even bigger deals, Contango Chairman John Goff told analysts during a conference call on Tuesday.
KKR is bucking the trend among private-equity peers that have been unloading shale investments after back-to-back oil-market busts. After years of poor returns and swelling debtloads, shale drillers were already out of favor when the Covid-19 pandemic crushed energy demand. KKR’s move may signal a bullish turn with U.S. crude prices heading for the best annual performance since 2015.
“With increased firepower, we can add a zero to the size of transactions that we have been executing on,” said Goff, who is Contango’s biggest shareholder. With combined adjusted 2022 earnings of as much as $800 million, the new company will be “massively larger than where we are today.”
Contango shares surged as much as 23% in early U.S. trading but have since surrendered those gains and were down 5.5% as of 10:43 a.m. in New York.
The combined firm’s footprint will include assets in key oil and natural gas basins from Texas to Colorado, according to a statement that confirmed an earlier Bloomberg News report. Upon completion, Independence shareholders will control about 76% of the company and Contango shareholders the rest.
“We think this is the right way to run an oil and gas business and we’re well-positioned going forward,” David Rockecharlie, who leads the KKR team that will manage the combined business, said in an interview. “The two companies have similar strategies in pursuing a differentiated cash flow and risk-based business.”
Other recent examples of such deals include Pioneer Natural Resources Co.’s $6.4 billion purchase this year of DoublePoint Energy LLC and the planned acquisition of Crestone Peak Resources by peer Civitas Resources Inc.
The new company, which will be based in Houston, is expected to operate under a new name and ticker symbol, and plans to seek a listing on the New York Stock Exchange, according to the statement. The deal is expected to close in the third or fourth quarter of this year. The $5.7 billion valuation includes debt.
New York-based KKR established Independence Energy in August 2020 to consolidate most of its energy assets as part of a private stock-for-stock acquisition. The company holds drilling rights in the Permian, Eagle Ford, Barnett and other shale regions, as well as mineral and royalty interests and midstream infrastructure.
Rockecharlie, head of KKR Energy Real Assets, will be chief executive officer of the new business while Goff will be chairman. Contango CEO Wilkie Colyer and President Farley Dakan will continue to manage Fort Worth, Texas-based Contango as an operating subsidiary of the new firm and will focus on expanding through acquisitions.
Contango has completed four acquisitions in the last 18 months, including a November deal to buy assets in the Big Horn, Permian and Powder River basins via a bank-owned liquidation of assets.
“When I look at the backdrop of the industry, it’s still ripe for continued consolidation,” Goff said in an interview. “We’re tracking numerous opportunities of assets and companies that are stranded that are either in the hands of non-natural owners or they have too much leverage or they have too much of an overhead burden and just can’t really survive in this era of the energy sector.”
Colyer pointed to Contango’s portfolio of so-called conventional assets in the Rocky Mountains, Great Plains and Permian Basin as areas to expect the company to continue to bulk up around.
Rockecharlie said the largest basin for the combined firm will be South Texas’s Eagle Ford, which he said was largely overlooked during a rush into the Permian of West Texas and New Mexico.
“We’ve got a lot of financial flexibility without the need to increase the relative debt metrics,” said Rockecharlie. “We can be an investment-grade company over time; that’s what we’re focused on. But it’s not going to limit our acquisition capability over time.”
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