CPPIB expands bet on Colorado fracking by joining new venture


DAVID MILSTEAD

INSTITUTIONAL INVESTMENT REPORTER
PUBLISHED JUNE 10, 2021

With energy prices hitting prepandemic highs, the Canada Pension Plan Investment Board is recommitting to its Colorado oil and gas operations by joining up with a new multibillion-dollar venture that promises to get even bigger.

The CPPIB will sell its Crestone Peak Resources venture to a new company, Civitas Resources Inc., which will be the product of two publicly traded Denver companies – Bonanza Creek Energy Inc. and Extraction Oil & Gas Inc. – with extensive Colorado drilling and fracking operations. The CPPIB will receive shares currently worth roughly US$1-billion and own about 26 per cent of the new company.

The CPPIB has committed around US$1-billion to Crestone since 2015, making it just a tiny part of the Canadian pension plan’s $497.2-billion in assets. But it may be the holding in the CPPIB’s portfolio that brings the debate over energy investing and climate change into sharp relief: Crestone, engaged in hydraulic fracking in communities on the edge of the Denver metro area, has run into significant citizen opposition and environmental criticism.

Cynthia Williams, a professor at York University’s Osgoode Hall Law School, has argued the CPPIB should make investments consistent with the Canadian government’s commitments to carbon-emissions reduction.

As part of the Crestone announcement, Bonanza Creek CEO Eric Greager said Civitas plans to be Colorado’s first carbon-neutral oil and gas producer, based on what are called Scope 1 and Scope 2 emissions – its direct emissions and emissions from the energy it purchases to run its operations, respectively. That does not include all other indirect emissions from its business operations, such as those created when its products are used by consumers (Scope 3 emissions).


Civitas will purchase carbon-offset credits to achieve that goal, Mr. Greager said in an investor call earlier this week, without disclosing how much will be needed to achieve it. “We’re intent on doing absolutely everything we can to reduce operational emissions,” he said. “But even when you’ve gotten as far ... as you can possibly go, our business has a carbon footprint.”

The deal values Crestone at US$1.3-billion, including US$250-million in bank debt. Bonanza Creek will first acquire Extraction, which emerged from a seven-month bankruptcy process in January. Then the combined company, newly dubbed Civitas, will acquire Crestone. The companies hope to close the deal by year-end; the CPPIB will place one person on the nine-member board. Civitas is expected to list on the New York Stock Exchange.

In a statement, Michael Hill, the CPPIB’s head of sustainable energy for the Americas, said Crestone “has demonstrated its commitment to operational strength and efficiency, along with its introduction of innovative sustainability practices.” The new company creates “a stronger platform ... with significant free cash flow and the potential to continue value creation.” On March 31, the CPPIB had $20-billion in direct energy investments, divided equally between its Power & Renewables group and conventional energy.

The combined company will be a dominant player in what’s called the Denver-Julesburg Basin, which is centred in eastern Colorado but stretches into neighbouring states of Wyoming, Nebraska and Kansas. Analyst Phillips Johnston of Capital One Securities Inc. said the deal “cements the notion that the new Civitas Resources is the natural consolidator of the DJ Basin, so it appears a roll-up story in the basin is firmly under way.”

Bonanza Creek had largely stuck to rural areas, avoiding the political challenges that can come from obtaining drilling permits in the cities and towns of the Denver metro area. But both Extraction and Crestone drill extensively in the communities surrounding Colorado’s capital.

That has led to controversy for Crestone. In 2020, The Globe and Mail detailed citizen unhappiness with a number of Crestone safety incidents, including a well-venting accident in September, 2017, that sent gases into a playground, and a fire in December, 2019, that sent seven workers to the hospital.

Even as the companies announced their transaction this week, they also had to acknowledge a fire at a Crestone site on Saturday in Arapahoe County, part of the Denver metro area. In a statement, Crestone said no injuries were reported, and no evacuations were necessary. There are no structures within a mile of the well pad, Crestone said. “Bonanza Creek, Extraction and Crestone Peak are focused on safety as our highest priority and core value,” Mr. Greager told analysts.

An investor presentation on the deal says Crestone should add US$400-million in EBITDA, or earnings before interest, taxes, depreciation and amortization, US$105-million in free cash flow, and production equal to 45 thousand barrels of oil a day to Civitas’ numbers. Crestone has 120,000 acres and 450 drilling locations in Colorado.

The companies expect to generate US$45-million in cost savings, three-quarters of which will come from reducing office space and cutting administrative staff and executives, said Matt Owens, the Extraction CEO who will serve as chief operating officer of the new company.

Leo Mariani, an analyst for KeyBanc Capital Markets, estimates the price paid for Crestone at US$29,000 per flowing barrel, which would make it twice as high as what Bonanza Creek paid for Extraction and for HighPoint Resources Corp., which was acquired in April. Price per flowing barrel is a company’s enterprise value divided by the number of barrels it produces daily.