California Resources Corp. agreed to an all-stock merger with Aera Energy, a joint venture created by Shell Plc and Exxon Mobil Corp., in a deal valued at $2.1 billion. The deal includes Aera’s net debt and other obligations, according to a Feb. 7 news release.

The deal comes almost one year after Exxon and Shell closed the sale of Aera to German asset manager IKAV for $4 billion in February 2023. Canada Pension Plan Investment Board (CPP) subsequently bought a 49% stake in the company.

California Resources (CRC) said it expects expected to be immediately accretive. At closing, Aera's owners will receive 21.2 million shares of CRC’s common stock, equal to approximately 22.9% of CRC’s fully diluted shares.

CRC said the transaction adds large, conventional, low decline, oil weighted, proved developed producing reserves and sustainable cash flow. In third-quarter 2023, Aera averaged 76,000 boe/d, 95% oil. The company had estimated proved reserves of approximately 262 MMboe at year-end 2024.

Pro forma for the transaction, CRC estimated it will average 150,000 boe/d (76% oil) and hold proved reserves of approximately 680 MMboe (90% proved developed). The combined company will own interests in five of the largest oil fields in California with opportunities to increase oil recovery.

Post-closing, CRC estimates free cash flow to more than double to $685 million in 2024 at strip pricing as of Jan. 25: $79.81 Brent and $2.65 Henry Hub. Through 2028, free cash flow will total nearly $3 billion.

CRC’s board also authorized a 23% increase to CRC’s buyback program, representing $1.35 billion. The program’s authorization was extended through year-end 2025. After the deal closes, and subject to board approval, the company expects to increase its fixed quarterly dividend.

CRC has identified synergies that management expects to total $150 million annually, which will be realized within 15 months of closing. Cumulative synergies over the next decade have an estimated PV-10 value of nearly $1 billion. Synergies are expected to be realized primarily through lower operating costs, capital efficiencies, G&A reductions and optimization of shared field infrastructure.

“This strategic transaction will create scale in our operations, generate significant free cash flow, accelerate cash returns to shareholders and expand our energy transition platform,” said Francisco Leon, CRC’s president and CEO. 

Leon said the company remains committed to reducing emissions and “this combination will advance our goal to permanently sequester 5 million metric tons per year of CO2 in our underground storage vaults.”

Erik Bartsch, Aera’s president and CEO, said the two companies have “decades of experience and track records that will serve as a foundation for a strong combination. We are committed to continuing to deliver the energy Californians need today and working to deploy carbon capture at-scale.”

The transaction, which has an effective date of Jan. 1, 2024, is expected to close in the second half of 2024.

Citi and Jefferies are serving as financial advisers and Sullivan & Cromwell LLP is serving as legal adviser to CRC. Wells Fargo acted as lead financial adviser alongside Truist and Latham & Watkins LLP is serving as legal adviser to CPP Investments and IKAV.