SM Energy (SM.N), opens new tab said on Thursday it had agreed to buy some shale assets of oil and gas producer XCL Resources for about $2 billion, extending its footprint in the Uinta region in Utah, sending its shares down 10%.
XCL, backed by EnCap Investments and Rice Investment Group, is one of the largest producers in the region with an output of around 55,000 barrels of oil equivalent per day.
Denver-based SM Energy, which operates in the Eagle Ford and Midland Basins in Texas, plans to finance the acquisition through a combination of debt and cash on hand.
“We don’t think investors will be enthused about entering the Uinta Basin. SM (Energy) is adding a fair bit of leverage on this transaction, but we see solid free cash flow paying a lot of this off in the next 12 months,” said analysts at Roth MKM in a note.
A deal in the Uinta basin was a chance to maintain capital discipline, SM Energy executives said in a conference call, while getting a good multiple and higher oil mix. Once the deal is completed, likely in September, the output from legacy assets will fall, they added.
The company expects oil to be greater than 50% of total production following the deal from 43% in 2023.
Northern Oil and Gas (NOG.N), opens new tab will also buy 20% of the oil and gas assets of XCL for $510 million, resulting in a total deal value of $2.55 billion.
Reuters reported in March that XCL Resources could be worth at least $2.8 billion, including debt.
A consolidation in the U.S. energy sector that triggered $250 billion worth of deals in 2023 has stretched into this year, as companies look for opportunities to deploy their cash hoard and boost their reserves – this deal
SM Energy will serve as the operator of the assets and the deal will extend the company’s reserves by two years. .