Earthstone Energy shares jump 15% on Permian Resources deal

Earthstone Energy Inc (NYSE: ESTE) popped up more than 15% up on Monday after Permian Resources Corp (NYSE: PR) revealed plans of buying the oil and gas company for $4.5 billion.

Why is Permian Resources buying Earthstone Energy?

Permian Resources expects this all-stock transaction to help expand its footprint in the Permian basin. Will Hickey – its Co-CEO also said today in a press release:

The said deal values each Earthstone Energy share at about $18.64.

On Monday, Permian Resources also revealed plans of raising its quarterly dividend to 6 cents – a 20% increase applicable from the first quarter of 2024. Its shares opened roughly flat this morning but are up a whopping 45% year-to-date.

Permian Resources expects an increase in free cash flow

Permian Resources is convinced that buying Earthstone Energy will boost its free cash flow on a per-share basis by more than 30% over the next two years. According to CEO Hickey:

The benefit to free cash flow will sit at over 25% over the next five to ten years, he added. Wall Street currently rates Earthstone Energy shares at “overweight”.

Permian and Earthstone have identified annual synergies worth about $175 million, as per the press release. The agreement will likely complete before the start of 2024 provided that it meets customary closing conditions, including regulatory and shareholders’ approval.