[Editor's note: This story was updated from a previous version posted at 2:15 p.m. CT Jan. 16.]

Noble Energy Inc. (NYSE: NBL) hit Delaware Basin pay dirt with the acquisition of Clayton Williams Energy Inc. (NYSE: CWEI) for $3.2 billion of equity, cash and debt.

On Jan. 16, Noble said it will absorb Midland, Texas-based Clayton Williams’ 71,000 net acres and 2,400 gross drilling locations in the core of the Southern Delaware in a deal some analysts said Noble needed to shore up inventory concerns. It also signals one of the first mergers of two public companies after the past 12 months saw public companies snatching up multiple private-equity-backed Permian companies.

Following the close of the deal, Noble’s U.S. resource inventory will increase to more than 2,850 gross highly-profitable wells, giving the company “at least a decade worth of high-quality drilling opportunities,” Mike Kelly, senior analyst with Seaport Global Securities LLC, said in a Jan. 17 report.

“We believe Noble needed additional Lower-48 inventory, and this transaction provides it with meaningful high-quality acreage, production visibility, and likely removes the overhang of M&A and pending equity,” David Tameron, senior analyst with Wells Fargo Securities LLC, said in a Jan. 17 report.

As part of the agreement, Houston-based Noble will issue 55 million shares of its stock and $665 million in cash for the acquisition of all Clayton Williams’ outstanding stock. Based on the closing stock price on Jan. 13, the value of the transaction is about $3.2 billion, including the assumption of nearly $500 million in net debt.

Noble Energy, Clayton Williams Energy, merger acquisition, purchase, buy, Delaware Basin, Permian Basin, West Texas, Reeves County, Ward County, Wolfcamp, shale, fracking, horizontal drilling, Mike Kelly, Seaport Global, analyst, David Tameron, Wells Farg

Noble will pay a 34% premium to Clayton Williams’ closing price Jan. 13, and a 21% premium to its average closing price over the last 30 days, Tameron said.

Clayton Williams’ Delaware acreage is highly contiguous and located in Reeves and Ward counties in West Texas, directly adjacent to Noble's existing 47,200 net acres. The total estimated net unrisked resource potential on the acreage is more than 1 billion barrels of oil equivalent (Bboe) in the Wolfcamp zones.

As a result of the combination, Noble will become the second-largest acreage holder in the Delaware Basin with nearly 120,000 net acres in the Delaware core, said David L. Stover, the company’s chairman, president and CEO.

“We have been very disciplined in assessing expansion opportunities in the Delaware Basin and are extremely pleased to have reached this agreement with Clayton Williams Energy,” Stover said in a statement. “This transaction brings all the key elements we value: excellent rock quality, a large contiguous acreage position adjacent to our own, and robust midstream opportunities, reinforcing the Delaware Basin as a long-term value and growth driver for Noble Energy.”

Kelly said Seaport downgraded Noble in November due to a lack of high-quality inventory. At the time, he estimated Noble had 1,443 gross locations in its U.S. resource inventory of proven formations capable of generating more than a 40% internal rate of return.

Noble Energy, Clayton Williams Energy, merger acquisition, Delaware Basin, Permian, West Texas, map

“With all that said, this was still the right move for NBL, in our opinion, as the transaction should prove to eliminate the ‘lack of inventory’ label, which is all but a death sentence for an E&P company in the eyes of Wall Street,” Kelly said.

Noble is set to drill the new acreage immediately, with plans to up its rig count to three by year-end 2017 from one rig currently. The company intends to add an additional two to three rigs over the next three years.

Noble expects accelerated drilling to boost production in the Delaware Basin to 60,000 boe/d by 2020, from the current average of 10,000 boe/d (70% oil).

Noble now anticipates an incremental $150 million in reported 2017 capex to be allocated to the Delaware Basin, bringing the total to about $500 million. The company’s total reported capex for 2017, excluding its midstream subsidiary, is now estimated to total between $2.1 billion and $2.5 billion.

In addition, Clayton Williams owns existing midstream Delaware assets including more than 300 miles of oil, natural gas and produced water gathering pipelines. The company also owns interests in an additional 100,000 net acres in other areas of the Permian.

Noble plans to use its undrawn $4 billion revolver to fund the cash portion of the acquisition, which it expects to close in second-quarter 2017. The transaction was approved by the boards of both companies.

Petrie Partners Securities LLC was the exclusive financial adviser to Noble and Skadden, Arps, Slate, Meagher & Flom LLP was its legal adviser. Evercore and Goldman, Sachs & Co. were financial advisers to Clayton Williams Energy and Latham & Watkins LLP was its legal adviser.

Emily Patsy can be reached at epatsy@hartenergy.com.