By Adam Bernabeu, Mahaut Bonnet de Roovere, and Malo Inizan (HEC), and Erica Chan, Hunter Pang, Jonathan Liu, Lasheeka Ramesh (LSE)
Photo: Chris Le Boutillier (Unsplash)
Overview of the deal
Acquirer : Chord Energy
Target : Enerplus
Implied Equity Value : $3.8 billion
Total Transaction Size : $11 billion (90% stocks ; 10% cash)
Closed date : Mid-year 2024
Acquirer advisors : Citi (financial), Vinson & Elkins LLP, Wachtell, Lipton, Rosen & Katz, and Goodmans LLP (legal)
Target advisors : Evercore and RBC Capital Markets (financial), Blake, Cassels & Graydon LLP, Latham & Watkins LLP (legal)
On February 20, 2024, the oil and gas exploration and production company Chord Energy announced it had entered into a definitive merger agreement to acquire Enerplus, a Canadian-based company specialising in crude oil, and natural gas exploration and development in the United States. The $11bn transaction comprises a 10% cash payment and 90% stock compensation for shareholders. Upon the completion of the deal, current Chord Energy shareholders will own a 67% stake in the combined company, while Enerplus shareholders will own around 33% interest, on a fully diluted basis. The two companies will become by far the biggest player in the Williston Basin with approximately 1.3 million net acres, and a combined 4Q23 production of 287,000 barrels of oil per day. Furthermore, the transaction is expected to generate up to $150 million annually in mainly administrative, capital and operational cost synergies. This merger follows the unprecedented trend of consolidation within the U.S. upstream oil and gas industry, driven primarily by companies’ strategies to secure inventories. M&A is now a preferred tool to secure durability and longevity for companies in the upstream business, as reserves keep declining and land gets costlier and scarcer. Tellingly, this transaction is the latest of a series of numerous M&A transactions in the energy sector, including Endeavor - Diamondback Energy ($26bn) and ExxonMobil - Pioneer ($60bn).
“Enerplus' Williston Basin position brings high-quality inventory, and we are excited to leverage best practices from both companies to create a stronger, more efficient entity.” - Danny Brown, President and CEO of Chord Energy
Company Details (Acquirer - Chord Energy)
Chord Energy is the result of the merger of equals of Oasis Petroleum Inc. (founded in 2007) and Whiting Petroleum Corporation (founded in 1980) in 2022. The new combination created a leader in exploration and production of oil and gas in the Williston Basin in the US. The Company owns approximately 963,000 acres of land in this region. The company produces crude oil, natural gas, and natural gas liquids (NGLs) and sells to refiners, marketers, and other buyers with access to the Williston Basin’s pipeline and transport facilities. Chord Energy produces on average ~120,000 net barrels of oil; 42,000 million barrels of natural gas and 38,000 barrels of NGL daily.
Founded in 2022, headquartered in Houston, Texas
CEO: Daniel E. Brown
Number of employees: 514
Market Cap: $6,794mm (as of 03/14/2024)
EV: $6,907mm
LTM Revenue: $3,636mm
LTM EBITDA: $1,966mm
LTM EV/Revenue: 1.9x
LTM EV/EBITDA: 3.3x
Recent Transactions: $375MM acquisition of Williston Basin Assets (2023)
Company Details (Target - Enerplus)
Enerplus is a Canadian-based company focused on North American oil and gas. Its light oil assets are located in the Bakken (North Dakota) and its gas assets are in the Marcellus natural gas shale region (northeast Pennsylvania). Its portfolio is composed of 62% of Crude oil and Natural Gas Liquids (NGLs) composed 62% of the portfolio, while natural gas accounts for 38%. Enerplus’s production in 2023 amounted to 100,015 barrels of oil equivalent and 2.8 million barrels of natural gas per day.
Founded in 1986, headquartered in Calgary, Canada
CEO: Ian C. Dundas
Number of employees: 404
Market Cap: $5,026mm (as of 03/17/2024)
EV: $5,204mm
LTM Revenue: $2,067mm
LTM EBITDA: $1,296mm
LTM EV/Revenue: 2.5x
LTM EV/EBITDA: 3.9x
Projections and Assumptions
Short-term consequences
The announcement of the $11 billion stock and cash transaction between Chord Energy and Enerplus, two major players in the Bakken Shale of North Dakota and Montana, foster the anticipation of the
emergence of a top-tier operator which would strengthen the strategic position of the Williston Basin.The combined entity will control 1.3 million acres, with an oil production expected to account for over
half of its operations.
With the acquisition of Enerplus, Chord Energy anticipates an increase in its inventory, resulting in a break-even point that is now reduced by over 60% compared to a price of $60 per barrel high-quality oil. This change is anticipated to drive improved profitability and consistent cash flow, regardless of
fluctuations in oil prices. Moreover, the estimated inventory can sustain approximately 10 years of development and offers new opportunities for growth, making the company stronger for the future.
The acquisition is also projected to deliver high returns and enhance capital efficiency for the combined entity, with analysts forecasting annual savings of up to $150 million. These savings are expected to grow progressively, reaching $40 million in administrative costs by 2025, while capital and operating savings could peak at $55 million each by 2026. Leveraging these efficiencies, the combined company aims to generate significant free cash flow, projecting around $1.2 billion in 2024 alone, further strengthening Chord's financial standing.
Long-term Upsides
With the $11 billion acquisition of Enerplus, Chord Energy has strengthened its position as a leading oil operator in the Williston basin and achieved value-adding scale. The combined inventory of both Chord and Enerplus optimises its development by using decades of in-basin expertise. This integration increases production to 279 million barrels of oil per day (Mboe/d), driving substantial value for the investors. Combined, they have a market capitalization of $10.4 billion and a pro forma enterprise value of $11.1 billion, pushing Chord into the large-cap peer group.
Moreover, there are significant synergies from the $750 million (after-tax PV-10) of estimated synergies. For example, they are expected to generate up to $150 million per year in cost savings from lease operating expenses, drilling, completions, and facilities, as well as administrative cost synergies. They are also accretive to both near and long-term metrics, such as free cash flow (FCF) per share, net asset value (NAV) per share, and return on capital (ROC).
Finally, Chord’s acquisition of Enerplus enables strong shareholder returns, yielding more capital to shareholders than its large-cap peer group. For instance, they have seen a 462% increase in shareholder return from January 2021 to January 2024, compared to their new peer median of 245% over the same period. There is also a return of 75%+ of free cash flow to investors and their annual $5.00/share base dividend. Overall, Chord Energy has 3.8x EBITDA 2024E, which positions it well to seek equity upside and significant long-term shareholder value creation.
Risks and Uncertainties
When considering the merger between Chord Energy and Enerplus, there are multiple risks stemming from both external and internal factors. A significant external risk is the geopolitical instability as conflicts like those between Russia, Ukraine or Israel and Hamas can disrupt global oil markets. Given that Chord Energy and Enerplus are located within the United States, their ability to export oil internationally is heavily influenced by US foreign policy. Unforeseen global conflicts or shifts in foreign policy could jeopardise anticipated profitability goals, which makes it challenging to navigate volatile market conditions.
Moreover, legislative and regulatory risks pose a considerable threat to the merger’s success. The changes in energy policies, environmental regulations or taxation laws in the US and Canada could significantly impact the operations and profitability of the combined entity. With increasing concerns about climate change, there is a possibility of stricter regulations being imposed in oil production, potentially limiting the merged company’s ability to operate or increasing compliance costs.
The fluctuating price of oil also means that Chord Energy and Enerplus are subject to the cyclical nature of commodity markets. This may directly impact revenue projects and profitability making it challenging to forecast earnings accurately. If oil prices deviate from expectations, the merged entity may face lower than anticipating earnings.
Financial risks also loom large over the merger. The transaction involves significant financial commitments, including issuing new shares and assuming debt. Managing the financial structure and debt levels amidst market uncertainties and economic conditions will be essential for the merged entity's long-term sustainability.
By addressing these risks effectively and implementing robust risk management strategies, Chord Energy and Enerplus can enhance the likelihood of a successful merger and create sustainable long-term value for their shareholders.