Earthstone Energy, Bold Energy III combine to focus on Midland Basin

Earthstone Energy Inc. (NYSE MKT: ESTE) and Bold Energy III LLC, a portfolio company of EnCap Investments LP, have entered into a definitive contribution agreement under which Earthstone will acquire all of the outstanding membership interests of Bold, inclusive of producing assets and undeveloped acreage, in an "Up-C" transaction.

 Upon completion of the transaction, current Earthstone stockholders will own approximately 39% of the combined company, and Bold members will own the remaining 61% on a fully diluted basis.

The transaction represents a transformational shift for Earthstone to a high-growth, Midland Basin-focused operating company. The existing Earthstone management team, including President and CEO, Frank A. Lodzinski, will lead the combined company. The combined company will maintain its headquarters in The Woodlands, Texas, and maintain an office in Midland, Texas.

Highlights of Bold's asset base and operations include:

  • Approximately 20,900 net surface acres (62,500 net effective acres) in the core of the Midland Basin
    • Approximately 16,000 net acres in Reagan County; 3,260 net acres in Upton County; 1,310 net acres in Midland County; and the remainder in Glasscock, Howard, and Martin Counties
  • 99% operated, 85% average working interest on net operated acreage
  • Approximately 500 gross highly prospective, largely de-risked operated horizontal drilling locations across multiple benches
    • Vast majority in the Wolfcamp formation with remainder in the Lower Spraberry
    • Further upside from future de-risking of additional Wolfcamp and Spraberry benches, increased drilling density, and potential acreage trades to create additional drilling locations
  • EURs, normalized to 7,500 foot laterals, ranging from 700 MBoe to 1,000 MBoe (56% to 71% oil), with further upside from ongoing improvements in completion techniques
  • Current net production of approximately 2,320 Boepd (63% oil) predominantly from 18 gross / 12.6 net horizontal operated Wolfcamp wells
  • Expected 2016 exit rate of 2,640 Boepd (61% oil)
  • Operating a one-rig drilling program, with two wells flowing back, one well being completed and six wells waiting on completion; one-rig program can satisfy all material leasehold obligations

Highlights of the combined company include:

  • As of September 30, 2016, the combined company had approximately $24.0 million of cash on-hand and $17.0 million of bank debt drawn against a combined $102.0 million reserve-based loan facility
  • Current production of approximately 7,400 Boepd (63% oil), consisting of 46% from the Midland Basin, 38% from the Eagle Ford, and 16% from the Bakken and other areas
  • Approximately 26,800 net surface acres (80,150 net effective acres) in the Midland Basin and 18,600 net surface acres in the Eagle Ford
    • Includes Earthstone's strong non-operated position in the core of the Midland Basin (Lynden Acquisition, closed May 2016) with 5,883 net acres (40% average working interest) in Howard, Glasscock, Martin, and Midland Counties with a prominent Permian Basin operator
  • Approximately 715 gross drilling locations in the Midland Basin
    • Operated (Bold Transaction): 500 gross locations (85% average working interest)
    • Non-Operated (primarily Lynden Acquisition): 215 gross (35% average working interest)
    • Additional locations expected from future de-risking of Wolfcamp and Spraberry benches, increased drilling density, and potential acreage trades to create more drilling locations

Frank A. Lodzinski, President and CEO of Earthstone, commented, "We expect to issue 2017 company-wide guidance and a capital expenditure budget in early 2017 that will include significant capital devoted to the Midland Basin. With this combination, our strategic focus is clearly directed toward further building our operated asset base in the Permian Basin. Our Eagle Ford and Bakken assets provide a strong source of cash flow to support a significant combined borrowing base and to fund our acquisition and development activities. As we proceed to closing, we will further refine our capital allocation initiatives and advise the market appropriately".

Transaction details
Under the "Up-C" structure, and the agreement, Earthstone will recapitalize its common stock into two classes – Class A and Class B, and all its existing outstanding common stock will be converted into Class A common stock. Bold will purchase approximately 36.1 million shares of Earthstone's Class B common stock for nominal consideration, with the Class B common stock having no economic rights in Earthstone other than voting rights on a pari passu basis with the Class A common stock. In addition, Earthstone has formed Earthstone Energy Holdings LLC, a Delaware limited liability company (EEH). At closing, EEH will issue approximately 22.3 million of its membership units to Earthstone and one of Earthstone's wholly-owned subsidiaries, in the aggregate, and 36.1 million membership units to Bold in exchange for each of the parties transferring all their assets to EEH. Each membership unit in EEH held by Bold, together with one share of Bold's Class B common stock, will be convertible into Class A common stock on a one-for-one basis. Therefore, upon the closing of the transaction, stockholders of Earthstone and unitholders of Bold are expected to own approximately 39% and 61%, respectively, of the combined company's then outstanding Class A and Class B common stock on a fully diluted basis. After closing, Earthstone will conduct its activities through EEH and be its sole managing member.

The transaction is further subject to the majority approval of Earthstone stockholders, including a majority of disinterested stockholders, as well as other customary approvals.

Stephens Inc. acted as independent financial advisor and provided a fairness opinion to the special committee of the board of directors of Earthstone. Tudor, Pickering, Holt & Co. acted as financial advisor to Bold. Legal advisors included Richards, Layton & Finger for the special committee of the board of directors of Earthstone, Jones & Keller, P.C. for Earthstone, and Latham & Watkins LLP for Bold.

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