March 20, 2018 / 9:48 PM / 8 months ago

Newly-formed Magnolia plans to buy acreage in Eagle Ford shale field

NEW YORK, March 20 (Reuters) - Magnolia Oil & Gas Corp expects to make acquisitions of modest-sized acreage in the Eagle Ford shale field as it seeks to build out the new company without compromising on a cash flow-focused business model, its incoming chairman told Reuters.

The formation of Magnolia was announced on Tuesday as part of a deal in which TPG Pace Energy Holdings Corp will buy assets from energy investor EnerVest for approximately $2.66 billion in cash and stock.

TPG Pace Energy is a special purpose acquisition company (SPAC) backed by TPG Capital and the former chief executive of Occidental Petroleum Corp, Steve Chazen, who will head Magnolia upon completion of the EnerVest deal.

Speaking to Reuters, Chazen said the new company would expand its position through "smaller, tuck-in deals" of Eagle Ford acreage that complement the assets from EnerVest, instead of pursuing large deals that would not consistently generate the same level of revenue.

Magnolia expects to invest less than 60 percent of its cash flow into drilling, with shareholder returns prioritized, according to a joint TPG Pace Energy and EnerVest statement.

Energy investors have increasingly voiced concerns about the poor share price performance of oil companies when the United States is producing more crude than at any point since the early 1970s.

Before partnering with EnerVest, TPG Pace Energy studied between 10 and 15 investments in different shale formations, but only "two or three" met its criteria of being a high-quality oil asset with strong cash flow, said Michael MacDougall, managing partner for TPG Pace Energy.

"If you have substantial free cash flow, then you can overcome the commodity cycle," he told Reuters.

TRANSACTION

Under the terms of agreement, funds controlled by EnerVest will own around 51 percent of Magnolia upon completion of the deal with TPG Pace Energy, which in turn will hold 43 percent.

EnerVest will also receive $1.2 billion in cash as part of the deal, which is scheduled to close before the end of the second quarter.

TPG Pace Energy will fund the deal using $650 million raised by its initial public offering in May, as well $300 million of debt and a further $350 million of equity placed in a fundraising round with institutional investors.

Credit Suisse and law firm Vinson & Elkins LLP advised TPG Pace Energy, while Citigroup and Gibson, Dunn & Crutcher LLP were the respective financial and legal adviser to EnerVest.

Reporting by David French Editing by Leslie Adler

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