The Ratings Game: Permian Resources building scale with $4.5 billion Earthstone Energy deal, analysts say

“Given the ramp up in the valuations in private equity assets over the last year, public company [mergers and acquisitions] is starting to look like a more attractive proposition for buyers to build scale versus targeting private equity deals,” Andrew Dittmar, director of Enverus Intelligence Research, said in a statement emailed to MarketWatch. “That is what [Permian Resources] is accomplishing with its purchase of [Earthstone Energy], which looks to be attractively priced relative to the prior private equity deals including [Earthstone Energy’s] purchase of Novo Oil & Gas.”

Related: Permian Resources to acquire Earthstone Energy in $4.5 billion all-stock deal

In June, Earthstone Energy announced a $1.5 billion deal to acquire privately held exploration and production company Novo Oil & Gas Holdings.

In a statement released Monday, Permian Resources said that the $4.5 billion Earthstone Energy deal boosts its exploration and production position in the Delaware Basin, something analysts also highlighted. The Delaware Basin forms part of the larger Permian Basin oil- and gas-producing area, which spreads across West Texas and part of southeastern New Mexico.

“The deal expands [Permian Resources’] Permian footprint to over 400,000 net acres,” Gabriele Sorbara, managing director of equity research at Siebert Williams Shank, wrote in a note Monday. “With a December 31st close assumed, we model the deal accretive across all key metrics.” Siebert Williams Shank raised its price target to $18 from $17 and reaffirmed its buy rating for Permian Resources.

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Truist Securities analyst Neal Dingmann thinks the Earthstone Energy deal could make Permian Resources a target for M&A in its own right. “We believe today’s Permian Resources acquisition will ultimately be one of the most accretive transactions in several quarters based on agreed price, cost savings, and future operating efficiencies among other things,” he wrote. “We also believe the combination sets [Permian Resources] up as a highly attractive future target given its strong pro forma assets and operations.” Truist Securities raised its Permian Resources price target to $18 from $16 and maintained its buy rating for the company. 

Shares of Permian Resources ended Monday’s session up 2.4%, while Earthstone Energy’s stock ended the session up 16.8%.