Earthstone, NOG Continue Permian Basin Expansion with $1.5B Novo Acquisition

By Andrew Baker

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Published in: Daily Gas Price Index Filed under:

Earthstone Energy Inc. and Northern Oil and Gas Inc. (NOG) are joining forces in the Permian Basin to acquire privately held Novo Oil & Gas Holdings LLC for $1.5 billion.

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Novo, an exploration and production (E&P) firm backed by EnCap Investments LP, operates in the northern portion of the Permian’s Delaware sub-basin. Earthstone has been advancing an acquisition spree in both the Delaware and Midland sub-basins.

The latest tie-up, slated to close during the third quarter, would see Earthstone take a 66.66% operating stake in the Novo assets, with NOG controlling the remaining 33.33%. Minneapolis-based NOG specializes in acquiring minority, non-operated stakes in Lower 48 onshore E&P assets. 

The Novo transaction would be the largest in NOG’s history, said CEO Nick O’Grady.

As for Earthstone, “Over the past few years, we strategically positioned the company as a significant operator in the Permian Basin,” said CEO Robert Anderson. He cited three acquisitions totaling about $2 billion in 2022, “including two significant northern Delaware Basin asset acquisitions.”

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Following the Novo deal, Earthstone expects near-term oil and gas production to surpass 135,000 boe/d. “Further, we anticipate free cash flow to increase significantly compared to standalone Earthstone as we have added substantial producing assets but are not increasing capital expenditures,” Anderson said. “The addition of approximately 200 high-quality, low breakeven locations deepens our drilling inventory and with our flat rig count, extends our inventory life significantly to over a decade. 

“We believe the benefits of continued consolidation are very compelling, and we strongly believe this is a value-creating transaction for Earthstone.” 

The Novo assets were recently producing about 38,000 boe/d (37% oil, 66% liquids) from 114 wells. They span roughly 11,300 net acres in Eddy County, NM, and Culberson County, TX.

The assets contain “high-return drilling inventory” with roughly 200 gross operated locations and an average breakeven oil price below $40/bbl, according to Earthstone.

The company said it plans to maintain five operated drilling rigs post-closing. 

“Given that Novo’s inventory immediately competes for capital, Earthstone intends to move one of its two drilling rigs currently operating in the Midland Basin to the Delaware Basin to focus on the Novo assets,” management said. “The net result will be Earthstone having four rigs operating in the Delaware Basin and one in the Midland Basin post-closing. 

“The Novo Acquisition and revised development plan continue Earthstone’s evolution over the past several years, with its drilling inventory and development program now heavily weighted towards the highly economic northern Delaware Basin assets.”

The transaction is not expected to change Earthstone’s 2023 capital spending forecast of $725-775 million, management said.

The deal would increase Earthstone’s Permian Delaware footprint by about 11,300 net acres to roughly 56,000 net acres. The company’s drilling inventory would grow by 24% to 1,020 gross locations, about 70% concentrated in the Delaware.

The company also noted that it sold a package of Midland assets on May 31 for cash proceeds of about $56 million.

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Andrew Baker

Andrew joined NGI in 2018 to support coverage of Mexico’s newly liberalized oil and gas sector, and his role has since expanded to include the rest of North America. Before joining NGI, Andrew covered Latin America’s hydrocarbon and electric power industries from 2014 to 2018 for Business News Americas in Santiago, Chile. He speaks fluent Spanish, and holds a B.A. in journalism and mass communications from the University of Minnesota.