Fort Worth, Houston firms to create $5.7B company through merger

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A merger between a Fort Worth-based company and a Houston company will create an oil and gas company with initial equity market capitalization of approximately $4.8 billion and enterprise value of approximately $5.7 billion.

Houston-based Independence Energy LLC and Fort Worth-based Contango Oil & Gas Co said on June 8 the two will merge in an all-stock transaction. Both companies ahve assets in the Permian Basin.

Contango is an independent oil and gas company whose business is to maximize production and cash flow from its portfolio of low-decline, producing assets primarily in the Mid-Continent, Permian, and Rockies areas. Contango has a track record of complementing that production and cash flow via acquisitions, having completed four  acquisitions in the last 18 months.

Independence is a diversified, well-capitalized upstream oil and gas business built and managed by KKR’s Energy Real Assets team with a scaled portfolio of low-decline, producing assets with meaningful reinvestment opportunities for low-risk growth across the Eagle Ford, Rockies, Permian and Mid-Continent.

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Since 2011, KKR’s Energy Real Assets team has been executing on a consistent cash flow and risk-based strategy, complemented by deep industry expertise, responsible investment practices and the broader capabilities of KKR’s global platform. KKR is a leading global investment firm.

The combined business will be managed by KKR’s Energy Real Assets team and led by David Rockecharlie, Head of KKR Energy Real Assets, who will serve as Chief Executive Officer.

Contango’s Chairman and largest shareholder, John Goff, will be Chairman of the Board of Directors of the combined company. Contango’s senior leadership, including CEO Wilkie Colyer and President Farley Dakan, will continue managing Contango as an operating subsidiary of the combined company and focus on growth via acquisitions.

“This is a very compelling merger for Contango shareholders providing substantial value accretion, significant scale and lower cost of capital. KKR’s desire to position the combined company to be their long-term primary platform to focus on continued consolidation in the industry is a testament to what the team has created at Contango,” said Goff. “As the largest shareholder of Contango and Chairman of the new combined company, I look forward to working with David Rockecharlie.”

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Under the terms of the transaction agreement, Independence will merge with an operating subsidiary of a new parent company, which will become a publicly traded entity at closing, and Contango will become a wholly owned subsidiary of OpCo. The new company at closing will have an “Up-C” structure. Contango shareholders will receive Class A Common Stock representing voting and economic rights in the new parent company. Independence’s owners will receive Class B Common stock representing voting rights in the new parent company and corresponding limited liability company units representing economic interests

The combined company will be headquartered in Houston and expects to operate under a new name and under a new ticker symbol. The combined company intends to seek to be listed on the New York Stock Exchange as part of this transaction.

The Board of Directors of the combined company will be designated by KKR as the holder of the preferred stock discussed below. The initial board of directors at closing will consist of nine directors with two directors designated by Contango, including Mr. Goff as Chairman, and seven directors designated by KKR, including Mr. Rockecharlie.

The transaction is expected to close late in the third quarter or early in the fourth quarter of 2021, subject to the approval of Contango shareholders, certain regulatory approvals and satisfaction of other customary closing conditions.

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Transaction Highlights (from company news release)

• Positions the combined company to be a leading consolidator in the U.S. oil and gas industry through increased scale, improved access to capital, low leverage and a successful, proven management team

• The combined company is positioned to be KKR’s primary platform for pursuing upstream oil and natural gas opportunities

• Projected to be highly accretive to financial metrics, including ~15% and ~50% accretive to Contango’s 2021E and 2022E cash flow per share, respectively, based on current management assumptions

• Projected to provide preliminary 2022 estimated Adj. EBITDA of $750MM – $800MM and unlevered Free Cash Flow of $375MM – $400MM, with ~75% of expected 2022 cash flow attributable to PDP2

• Balanced portfolio of cash flowing assets and attractive, low-risk reinvestment opportunities in key proven basins across the Lower 48

• Low leverage with pro forma Net Debt / NTM Adj. EBITDA of 1.4×3

• Cash flow-oriented business model with a clear focus on superior risk-adjusted returns

• Shared commitment to developing industry-leading Environmental, Social and Governance (“ESG”) programs and continually improving ESG performance

• Greater than $20 million in estimated G&A synergies with further benefits of scale over time

• Initiation of a go-forward dividend policy targeting approximately 10 percent of Adj. EBITDA