Centennial Resource Development Inc.’s recently announced merger with Colgate Energy—with Centennial offering a $3.9 billion dowry in cash and stock—looked to be almost inevitable.

The deal addresses Centennial’s inventory concerns, comes without overpaying and spares Colgate Energy from a potentially uphill IPO climb.

Gabe Daoud Jr., an analyst at Cowen, pegged Colgate Energy as a potential acquisition target for Centennial last August, noting that Colgate’s acreage “fit like a glove.”

Indeed, the two companies, should the merger close, would double Centennial’s scale and make the combined entity the largest Delaware Basin pure player. Pro forma, the new company—with an as-yet unveiled new brand name—will span 180,000 net acres, 40,000 net royalty acres and average production of 135,000 boe/d as of May, Daoud said.

Colgate’s recent M&A tear, with a “string of pearls” acquisition strategy, formed an IPO-ready portfolio with assets in Reeves and Ward counties, Texas, and New Mexico’s Eddy and Lea counties. Whether the market is ready for an E&P to launch a public offering will now be a question answered by a company other than Colgate.

Daoud said in a May 19 report that the combined company would increase production 7%, to 145,000 boe/d by the fourth quarter that would further ratchet up next year. By third-quarter 2023, the company forecast 160,000 boe/d based on a drilling program of 140 wells per year.

“Management avoided communicating a capital plan associated with this program but from an operational standpoint the combined company aims to leverage efficiencies (CDEV spud-to-spud 14 days vs. Colgate’s 20) to achieve the plan with less activity than the current 7 rig/3 crew program,” Daoud said.

Based on cost, the combined company will target LOE and cash G&A below $7/boe compared to Centennial’s 2022 guidance of $7.05/boe.

Centennial will pay a premium price for Colgate relative to its own valuation, said Wells Fargo analyst Joseph McKay, in a May 19 report. Based on first-quarter 2022, Colgate’s hedged EBITDA multiples are 4.7x compared to Centennial’s 3.3x.

“We estimate the deal is moderately dilutive to our 2023 estimates” after dividends, FCF/EV and EV/EBITDAX, McKay said. “Valuation has been one of the headwinds to the CDEV narrative and the transaction likely stokes that argument.”

Cowen’s Daoud said Colgate’s $863 million in EBITDA (an annualized figure based on the first-quarter) Centennial’s $3.9 billion valuation suggested a 4.5x multiple. That compares to Centennial’s own 2.5x EV/EBITDA.

“From a production / NAV standpoint valuation appears more attractive as CDEV's PDP is worth about $50,000/flowing and assuming a similar production mix for Colgate the 70,000 boe/d implies ~$3.5B for current production vs. $3.9B paid,” Daoud said.