In a sign of the continued pressure to consolidate drilling operations, two of Colorado’s midsized oil and gas companies on Monday announced an all-stock merger to create a new company worth $2.6 billion.
Bonanza Creek Energy and Extraction Oil & Gas said they will combine to create Civitas Resources, controlling 425,000 acres of leases across nine counties, mainly centered on the Denver-Julesburg Basin stretching from the Denver metro area to the Wyoming border.
“Consolidation in the DJ is inevitable,” Bonanza Creek CEO Eric Greager told financial analysts in a conference call. Greager will become the CEO of Civitas.
As long as oil and gas prices, which have rebounded from 2020 lows, hold steady, Greager said the company would focus on the better reserves in the more densely populated suburban corridor where Extraction has been active.
“That seems to be a subtle way of saying neighborhood drilling is still part of their portfolio,” said Andrew Forkes-Gudmunson, deputy director of the League of Oil and Gas Impacted Coloradans (LOGIC), a grassroots, nonprofit organization.
As part of the merger, Civitas executives said the company was making a commitment to become the first Colorado operator with net-zero emissions and to have continuous air monitoring at its sites. Achieving net-zero emissions would come from a combination of reducing emissions at Civitas operations and purchasing certified emission offsets.
“Offsets don’t help the residents where they are drilling for oil and gas,” Forkes-Gudmunson said.
Both companies drill in oil- and gas-rich shale formations, which are also found in a number of other states, including Texas, North Dakota and Pennsylvania. During the “shale boom” starting in 2014, many operators borrowed heavily to boost production. By 2019, the United States was the biggest oil producer in the world, churning out 13 million barrels a day.
Shale drillers, however, were running red ink and not returning cash and dividends to investors. In 2020, the combination of plunging oil prices and the COVID-19 pandemic led to a rash of bankruptcies and mergers across the nation’s shale fields.
“Consolidation isn’t unique by any means to the DJ, but the DJ is ripe for consolidation,” said Matthew Hagerty, an industry analyst with BTU Analytics.
In April, Bonanza Creek completed the $376 million acquisition of another Colorado driller, HighPoint Resources, which had slipped into bankruptcy.
In June, Extraction also filed for Chapter 11 bankruptcy reorganization, emerging from it in January.
“Extraction was a natural candidate for consolidation in the DJ Basin following its emergence from Chapter 11,” Andrew Dittmar, a merger-and-acquisition analyst at Enverus.
The fact that Extraction was able to shed some debt during the bankruptcy proceedings is one of the things that made it attractive, Dittmar said.
“We expect this business to be a cash-flow machine … returning a meaningful amount of that cash to our shareholders,” Greager told the financial analysts.
Bonanza Creek’s acreage is mostly on the eastern side of the DJ Basin, in more-rural areas. Extraction’s holdings are in the urban-suburban corridor on the western side of the basin, which is more densely populated but where Greager said there is higher-quality reservoir rock.
In addition to its pledge to be a net-zero emission operator, Civitas said it will seek independent certifications for facility engineering to reduce environmental impacts and for responsibly sourced gas. It will also convert its fleet to electric vehicles.
“There has been a push by investors on the environment and operators have doubled down on it quarter after quarter, especially after (Joe) Biden was elected,” Hagerty said. “It remains to be seen what it means.”
Under the terms of the deal, Bonanza Creek and Extraction shareholders will exchange their shares for ones in Civitas that will give each side 50% of the new company.
There are not many publicly traded companies left for acquisition in the DJ Basin, Dittmar said, but there are still private companies and oil and gas acreage to be obtained.
“The new Civitas Resources is placing itself in the driver’s seat for this type of consolidation,” Dittmar said.
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