Strategic Shale: Vital Energy and Northern Oil’s $1.1 Billion Joint Venture in the Delaware Basin

Vital Energy, Inc. (VTLE) and Northern Oil and Gas, Inc. (NOG) have announced a significant joint venture to acquire shale assets from Point Energy Partners, a company backed by private equity firm Vortus Investments. The deal, valued at $1.1 billion, marks a strategic expansion in the Delaware Basin, a crucial area of the Permian Basin that spans Texas and New Mexico—America's shale heartland.

Under the agreement, Vital Energy will acquire an 80% stake, while Northern Oil and Gas will purchase the remaining 20%. This partnership underscores the resilience of both companies amid broader industry challenges and their commitment to capitalizing on high-value drilling sites.

Strategic Implications and Financial Accretion

This joint venture is a continuation of the consolidation trend, where U.S. energy producers are aggressively pursuing assets to leverage higher commodity prices and secure prime drilling locations. The strategy reflects confidence in sustained oil and gas demand over the medium to long term. For Vital Energy and Northern Oil and Gas, this transaction boosts their operational scale in the Delaware Basin, enhancing their financial performance immediately.

The deal comes with a purchase price of about 2.4 times the expected earnings before interest, taxes, depreciation, and amortization (EBITDA) for the next twelve months. It expands Vital's holdings in the Delaware Basin by 24%, adding 60.6 million barrels of oil equivalent in proved reserves. Financially, the acquisition is set to increase cash flow by over 30% at closing, maintain a strong hedging strategy, and achieve a leverage ratio of approximately 1.3x within a year. Additionally, the deal includes 68 primary drilling locations with significant development potential, forecasting a breakeven cost of around $47 per barrel, which suggests profitable operations even if oil prices dip.

Operational Dynamics and Future Development

Vital secured approximately 16,300 net acres, currently yielding about 30,000 barrels of oil equivalent per day as of April. Post-acquisition, Vital plans to strategically slow development, adjusting production to about half of its current level in the subsequent quarter, aligning with broader industry trends of optimizing output and efficiency.

Northern Oil and Gas will incorporate about 4,000 net acres located primarily in Ward County, Texas, into its portfolio, with production recently exceeding 4,500 barrels per day. Vital Energy, serving as the operator, will spearhead the development efforts in collaboration with Northern, reflecting a well-coordinated approach to maximize asset value and shareholder returns.

Advisory and Future Discussions

Houlihan Lokey served as the financial advisor to Vital Energy and NOG for this transaction, reinforcing its reputation for facilitating significant deals within the energy sector. The firm's role in navigating the complexities of this high-stakes transaction highlights its expertise and strategic acumen.

J.P. Hanson, Managing Director and Global Head of Oil & Gas at Houlihan Lokey, is set to speak at the North American Energy Capital Assembly. During the “M&A & Consolidation: Redefining The O&G Industry Amidst A Record-Breaking M&A Spree” panel, Hanson will delve into the future of industry consolidation, the dynamics of capital markets, the increasing influence of independent operators, and the strategies for asset management within the rapidly evolving U.S. oil sector.