Bonanza Creek Energy said this week it is purchasing smaller rival HighPoint Resources in an all-stock deal the companies said is valued at nearly $376 million.
The acquisition is expected to put Bonanza Creek on pace to produce 50,000 BOE/D (about 53% oil) from more than 200,000 contiguous acres in Colorado’s DJ Basin.
A key driver behind the deal was Bonanza Creek’s need to improve sustainable free cash flow by creating a company with greater scale, said a company announcement. HighPoint meanwhile is entering into the deal under a restructuring plan, signaling that its only other option is to seek court-supervised bankruptcy protection.
Bonanza Creek said its cash flow target for next year is $130 million that will be used to reduce debt, pay investors, and development reinvestment. Hitting the goal will require the company to shed more than $100 million in overhead and personnel costs while another $50 million in savings is expected to come from operational and capital efficiencies.
The buyer also noted its plans to sustain its current production rate and achieve its profit targets by focusing almost exclusively on bringing on line its inventory of drilled-but-uncompleted wells (DUCs) until at least 2022. The company noted the initial rate of returns on DUCs is greater than 60% compared to around 30% for its future undeveloped locations.
Bonanza Creek will also benefit from assuming HighPoint’s midstream infrastructure, noting in the announcement that it “should provide additional flow assurance, operating and surface cost efficiencies and greater flexibility to third-party processing and takeaway.”
The announcement stressed that due to the ruralness of its operating areas, Bonanza Creek does not expect to be affected much by impending state regulations that will implement stricter setbacks for drilling operations near occupied buildings. “Bonanza Creek remains committed to engaging community stakeholders to ensure safe, thoughtful, and responsible development,” the company said.
Terms of the deal include issuing 9.8 million shares of Bonanza Creek stock to HighPoint debt holders which equates to an almost 30% share of the company. On a pro forma basis, Bonanza Creek’s investors will retain 68% equity after the acquisition completes
Additionally, the debt holders have been issued senior unsecured notes of up to $100 million, due by 2026. Existing shareholders of HighPoint will be left with 1.6% equity in Bonanza Creek.
If the equity exchange offer is not approved by more than 97% of HighPoint shareholders, then the company will enter into a prepackaged bankruptcy that will still end with an acquisition by Bonanza Creek.
Two of HighPoint’s lienholders will be granted seats on Bonanza Creek’s seven-person board of directors. Eric Greager, who joined Bonanza Creek in 2018, will remain on as president and CEO of the combined company.
Boards of both companies have approved the acquisition that is expected to close sometime in early 2021.
