(Reuters) - Oil and gas producer PDC Energy Inc on Monday agreed to buy smaller rival SRC Energy Inc in a $971.3 million all-stock deal, in an attempt to boost its cash flow and create the second largest producer in Colorado’s DJ basin.
The news of the deal, expected to immediately add to PDC’s cash flow, sent shares of the company soaring to 23% and SRC shares up 17.6%.
Investors have long been pressing energy companies to shore up capital and pay out dividends and buyback shares.
PDC also raised its share buyback program to $525 million from $200 million and plans to use almost half of its estimated free cash flow of about $800 million to buy back shares till the end of 2021.
The merged entity will hold 182,000 net acres in the Wattenberg field in the DJ basin, along with PDC’s 36,000 net acres in the Permian Delaware basin. PDC is expected to exit 2019 with about 200,000 barrels of oil equivalent per day in production.
The offer, under which SRC shareholders will get 0.158 PDC shares for each share held, implies a price of $3.99 per SRC share or a 3.9% discount to the company’s close on Friday.
Jefferies analysts said that while the deal valued SRC cheaply, it made sense as the stricter regulatory environment for oil and gas development and pipeline capacity issues in the Wattenberg Field had hit growth for some operators in the region.
PDC expects to save about $40 million of its general and administrative expenses in 2020 and an another $10 million in 2021.
After the deal closes, expected in the fourth quarter, PDC shareholders will own about 62% of the company, while SRC will own the rest.
PDC’s management team, with its expanded nine-member board including two SRC directors, will lead the company, to be headquartered in Denver, Colorado.
“On the headline this deal looks to check all the boxes Wall Street has asked for including consolidation of duplicate corporate structures, sticking to a basin the buyer knows well and not overpaying on premium,” Enverus’ M&A analyst Andrew Dittmar said, adding that a positive reaction from investors could help spur further deals.
J.P. Morgan served as financial adviser to PDC, while Citi and Goldman Sachs & Co. advised SRC.
Reporting by Shariq Khan in Bengaluru and Liz Hampton in Denver; writing by Arathy S Nair; Editing by Shinjini Ganguli