Earthstone Energy enters Midland Basin

Earthstone Energy Inc. (NYSE MKT: ESTE) has agreed to acquire Lynden Energy Corp. (TSX Venture: LVL; PINKSHEETS: LVLEF) in an all-stock transaction marking Earthstone’s entry into the Midland Basin. At closing, Earthstone will issue approximately 3.7 million shares of its common stock to Lynden stockholders, which will represent approximately 21% of Earthstone's outstanding common stock following the closing.

Analysts with Seaport Global Securities like the move into Midland, detailing in an investor note Thursday that Earthstone paid close to PDP value for Lynden. “At yesterday's closing price of $18.15, the transaction equates to a ~$67.2MM purchase price. Applying a $45K/flowing boe multiple, this leaves room for a menial ~$324/net undeveloped acre (vs. other recent Midland transactions at >$30K+/acre),” they continued.

Lynden's primary assets include:

  • 14,765 gross / 5,883 net acres located in the core Midland Basin counties of Glasscock, Midland, Martin, and Howard, Texas.
    • Working interests in 107 gross / 43.8 net vertical producing Wolfberry wells
    • Working interests in 2 gross / 0.9 net recently drilled horizontal Wolfcamp wells in Glasscock County
    • Working interests in 2 gross / 0.4 net horizontal wells in Martin County (1 gross Lower Spraberry well and 1 gross Wolfcamp well)
  • Over 150 proved gross vertical Wolfberry locations on 20 to 40 acre spacing, with potential for 50 gross horizontal Wolfcamp A and B wells.
  • Additional upside in the expanding horizontal Spraberry trend, multiple benches of the Wolfcamp, and the Cline.
  • Further upside in 104,000 gross / 52,000 net acres in a single contiguous lease on the eastern shelf of the Permian Basin located in Coke, Mitchell, and Sterling Counties, Texas.
  • Daily production of approximately 1,450 boe/d (53% oil, 77% liquids).
  • As of June 30, 2015, SEC proved reserves totaled approximately 13.4 MMboe (34% proved developed, 50% oil, 76% liquids), as prepared by Lynden's independent reserve engineers, Cawley, Gillespie & Associates Inc. The proved reserves exclude any associated reserves related to future horizontal development.

Earthstone's existing senior management team will lead the combined company and plans to continue to work with CrownQuest Operating LLC, which serves as operator of most of Lynden's assets in the Midland Basin.

Frank A. Lodzinski, president and CEO of Earthstone, commented, "We will diversify our asset base and move into attractive acreage with significant horizontal potential in the Midland Basin. We will also broaden our shareholder base through this all-stock deal. Many in the financial community will recall that in our prior public company, GeoResources Inc., we initially entered the Bakken shale play in the Williston Basin on a non-operated basis with another excellent operator and quickly established an operating presence thereafter. We intend to expand our presence in west Texas and pursue operated properties and acreage as our management team has done in each of our four prior public companies.

Under the agreement, Earthstone will issue a total of approximately 3.7 million shares of common stock to Lynden stockholders. Each Lynden stockholder will receive 0.02842 of a share of Earthstone stock in exchange for each share of Lynden common stock held, representing consideration to each Lynden stockholder of US$0.52 per share based on the closing price of Earthstone common stock on December 16, 2015. Following the Transaction, stockholders of Earthstone and Lynden are expected to own approximately 79% and 21%, respectively, of the combined company on a fully diluted basis.

Earthstone intends to refinance under its secured revolving credit facility all indebtedness of Lynden, consisting solely of US$37.2 million of borrowings under its revolving credit facility. As of September 30, 2015, the combined company would have had US$49.3 million in cash on hand and US$48.3 million drawn under a borrowing base of US$117.5 million. At closing, Earthstone anticipates that a new borrowing base will be established.

Completion of the Transaction is subject to the approval of Lynden stockholders, a final order from the court in British Columbia to approve the Agreement and the fairness of the terms and conditions of the transaction, certain stock exchange approvals, and customary closing conditions.

Concurrently with the execution of the agreement, Oak Valley Resources LLC, which owns approximately 66.0% of the outstanding shares of Earthstone common stock, executed a written consent in favor of the transaction. Also, with the execution of the agreement, the executive officers and directors of Lynden and affiliates of JVL Advisors LLC, all in their capacities as stockholders of Lynden, each entered into a voting support agreement with Earthstone to vote in favor of the Transaction. Their shares of Lynden common stock constitute approximately 1% and 18%, respectively, of the total outstanding shares of Lynden common stock.

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