[Editor's note: This breaking news story has been updated with comments from EOG's conference call.]

EOG Resources Inc. (NYSE: EOG), a rare participant in M&A, said Sept. 6 it will purchase Yates Petroleum Corp. in a mammoth deal that vastly expands EOG’s Permian and Powder River basin holdings.

EOG, already an Eagle Ford powerhouse, will pay more than $2.5 billion in cash and stock for assets held by Yates, a private, independent company and other companies that hold 1.6 million net acres in the Western U.S.

Despite the size of the acquisition, EOG chairman and CEO William R. “Bill” Thomas described the deal in a Sept. 6 press call as “a really big bolt-on.”

EOG will more than double its holdings in the Delaware Basin and adjacent plays and greatly expand in the Powder River Basin. The company does not intend any immediate changes to capex, though it will likely add a rig in the fourth quarter and another in 2017.

EOG Resources, Yates Petroleum, deal, highlights, map

Yates’ position in the Delaware includes 186,000 net acres of stacked pay in New Mexico that is prospective for the Wolfcamp, Bone Spring and Leonard shale formations. The Yates’ acreage increases EOGs’ Delaware position by 78% to 424,000 net acres.

Yates, which has been drilling since 1924, has been the target of many E&Ps over the years, said Charles Robertson II, an analyst at Cowen and Co.

“This transaction increases Permian and more specifically Delaware Basin locations to a level that is meaningful to EOG's relative size,” he said.

With EOG's existing acreage, the newly combined company will have 574,000 net acres in the Delaware Basin and Northwest Shelf.

“This transaction combines the companies’ existing large, premier, stacked-pay acreage positions in the heart of the Delaware and Powder River basins, paving the way for years of high-return drilling and production growth,” Thomas said. “We are excited by this unique opportunity to advance EOG’s strategy of generating high-return growth by developing premium wells at low costs that enhance long-term shareholder value.”

EOG Resources, Yates Petroleum, deal, at a glance, table

Yates’ production and reserves include:

  • Volumes of 29,600 barrels of oil equivalent per day (boe/d), 48% crude;
  • Proved developed reserves of 44 MMboe;
  • Delaware Basin position of 186,000 net acres;
  • Northwest Shelf position of 138,000 net acres;
  • Powder River Basin position of 200,000 net acres; and
  • Additional 1.1 million net acres in New Mexico, Wyoming, Colorado, Montana, North Dakota and Utah.

The transaction with Yates adds 1,740 locations — what EOG terms “premium locations” — mostly in the Delaware Basin and Powder River Basin.

Douglas E. Brooks, CEO of Yates, said the EOG deal was a “tremendous opportunity to combine EOG's strong technical competencies with the enormous resource potential of the Yates acreage to create significant value for Yates and EOG shareholders alike.”

Delaware Basin, Northwest, acreage map, EOG Resources, Yates Petroleum

Brooks previously served as CEO for Aurora Oil & Gas, a pure play Eagle Ford Shale company sold to Baytex Oil Corp. in June 2014 for $2.7 billion.

Thomas said EOG executed the deal because the acreage was high quality and as good as or better than EOG’s existing acreage.

“Most importantly the Yates acreage substantially increases EOG ability to increase returns and capital efficiency,” Thomas said. “This really isn’t about getting bigger. It’s about getting better.”

With EOG adding critical mass in the Delaware, Evan Calio, analyst at Morgan Stanley, said he expects “Nobel and Anadarko Petroleum to potentially to follow suit and pursue private packages currently on the market. All three players expressed desire to bulk up in the play.”

Yates’ 38,000 net acres on the Northwest Shelf in New Mexico are prospective for the Yeso, Abo, Wolfcamp and Cisco formations. The shallow plays have the potential to contribute additional amounts of premium inventory with the application of EOG's advanced completion and precision targeting technologies and low cost structure.

Yates’ holdings will also expand EOG’s Powder River Basin holdings with another 81,000 net acres in development area prospective for the Turner Oil play. In all, Yates will add 200,000 net acres in the Powder River Basin. That doubles EOG's total Powder River Basin acreage to 400,000 net acres.

Asked what led to the deal, Thomas said on the press it really “all boils down to we just see a unique opportunity to add very, very high quality acreage.”

Under the terms of the agreements, EOG will issue 26.06 million shares of common stock valued at $2.3 billion and pay $37 million in cash, subject to certain closing adjustments and lock-up provisions.

EOG will assume and repay Yates’ $245 million of debt, offset by $131 million of anticipated cash from Yates.

Closing is anticipated in early October 2016, subject to customary closing conditions. EOG intends to maintain Yates' office in Artesia, N.M.

Wells Fargo Securities LLC acted as exclusive financial and technical adviser to Yates, Abo Petroleum Corp. and MYCO Industries Inc. for the transaction. Thompson & Knight LLP, Modrall Sperling Law Firm and Kemp Smith LLP acted as legal advisers to Yates, Abo Petroleum MYCO.

Akin Gump Strauss Hauer & Feld LLP acted as legal adviser to EOG.

Darren Barbee can be reached at dbarbee@hartenergy.com.