Merger Positions KKR for Consolidation

KKR's Independence Energy is merging with Contango Oil & Gas in an all-stock deal designed to give the private equity firm a platform for consolidating upstream oil and natural gas assets across the US. Both US producers have assets in proven basins including the Eagle Ford Shale, the Permian Basin, the Rocky Mountains and the Midcontinent. Key Takeaways • The new company is expected to produce 108,000-114,000 barrels of oil equivalent per day in 2022, with adjusted core earnings between $750 million and $800 million; • The firm will keep its reinvestment rate close to 50%; • Up to $400 million in free cash flow will be generated within 18 months by the merger, according to Independence and Contango. The pro forma company is valued at an estimated $4.7 billion-$5.8 billion, based on Contango's closing share price of $5.62 on Monday. But after an initial pop following the announcement early Tuesday, Contango's shares declined throughout the day. By market close, shares prices had dropped 10% to $5.06. KKR in Charge The initial board structure will consist of two members designated by Contango, while Independence will seat seven members. However, KKR will have the ultimate authority to appoint all members of the board. Ownership of the new company will be split 76% to Independence and 24% for Contango. KKR will receive a special class of noneconomic preferred stock, which adds a 17% ownership in the new company to KKR's portfolio, according to a press release. Terms of the deal also give KKR the authority to exercise some consent rights over actions such as incurring debt, officer changes, mergers and acquisitions, and divestitures. It's Complicated Independence and Contango's merger may be more complex than most of the recent roll-ups in the US upstream. Independence will merge with an operating subsidiary of a new parent company, which will become a publicly traded firm at closing, and Contango will be a wholly owned subsidiary of that firm, according to the companies' joint statement. KKR's Energy Real Assets team will manage the firm, with David Rockecharlie, head of KKR Energy Real Assets, taking the role of CEO. Contango's chairman and largest shareholder, John Goff, will be the chairman of the pro forma firm. Deon Daugherty, Houston