A Southern Delaware Basin E&P that skipped its IPO in June is likely to go public after all, just not as it had expected.
Mark Papa-led Silver Run Acquisition Corp. (NASDAQ: SRAQ) said July 22 it has agreed to acquire a controlling interest in Centennial Resource Production LLC, an independent oil and natural gas company located in the core of the Southern Delaware Basin.
The purchase will cost Silver Run $1 billion in equity. The deal also pays off Centennial’s $188 million debt. Combined with Centennial, Silver Run will create a company Papa estimates to hold an enterprise value of $1.7 billion.
Silver Run will be renamed Centennial Resource Development Corp. and hit the ground running with $100 million in cash and zero debt. Centennial will trade on the NASDAQ stock exchange under the ticker symbol CDEV.
Papa, chairman and CEO of Silver Run, said in a July 22 call about the transaction that Silver Run had captured exactly the asset he had promised investors during the company’s “road show” promoting Silver Run.
Papa described Centennial as an oily producer in the Permian with existing production, growth potential and low debt that would be “amenable to [fracking] technology upgrades.”
Papa discussed the company’s production only in terms of oil, saying the asset has the potential to grow by several multiples of the current 6,000 barrels per day (bbl/d).
“I would say our growth potential over the next four or five years is likely the best percentage growth, year on year, of any small-cap Permian Basin peer group company,” he said. “Associated with that is very low geological risk. The risk will be simply execution risk and of course crude oil price risk, but not geological risk.”
About 85% of the asset is company operated, which Papa said is important to him because “you control your own fate that way. You’re not relying on other companies.”
Being in oil friendly Texas and on private, not federal land, also made the deal more attractive, Papa said.
“That’s as good as it gets,” he said.
Twists And Turns
Funding for the deal is a jumble of different investment groups buying into a company that will retain some of its private equity sponsor’s interest. Papa, the former CEO of EOG Resources (NYSE: EOG), will lead the company.
On July 6, Riverstone Holdings LLC signed an agreement to acquire a majority stake in Centennial from its backer, NGP Energy Capital (NGP). In June, Centennial had filed paperwork with the U.S. Securities and Exchange Commission to launch an IPO.
Earlier this year, Riverstone and Papa together raised $500 million for Silver Run to acquire assets.
On July 22, Riverstone assigned its right to purchase the Centennial assets over to Papa’s group.
To fund the transaction, Silver Run intends to obtain financing through a private placement of 81 million shares of Class A common stock to Riverstone and 20 million shares to funds managed by Capital World Investors, Fidelity Management and Research Co. Each share will cost $10.
Silver Run said it expects to receive $1 billion in net proceeds from its stock sales. NGP will retain about 11% interest in Centennial.
If Silver Run stockholders approve the transaction and other customary conditions are met, the transaction is expected to close in September.
Centennial’s existing senior management team, led by CEO Ward Polzin, will provide transition services for a period of time as Papa looks to permanently fill key management positions.
Papa said that, depending on market conditions, the new Centennial’s hunt for acquisitions may not be over in the long run.
“This is clearly a strong stand-alone asset and will make a fine company by itself. But it could also be a fine initial building block,” he said.
Citigroup Global Markets Inc. acted as capital markets adviser and sole private placement agent to Silver Run and as financial adviser to Riverstone. Deutsche Bank Securities Inc. and Goldman, Sachs & Co. acted as capital markets advisers to Silver Run; and Weil, Gotshal & Manges LLP acted as legal counsel to Silver Run. Evercore Group LLC acted as financial adviser to Silver Run’s board of directors.
Latham & Watkins LLP acted as legal counsel to Riverstone. Tudor, Pickering, Holt & Co. acted as financial adviser to Centennial in connection with the transaction; Credit Suisse Securities (USA) LLC and Barclays Capital Inc. acted as capital markets advisers to Centennial; and Vinson & Elkins LLP acted as legal adviser to Centennial.
Darren Barbee can be reached at email@example.com.
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