Alt

Alt: for alternate ways to have paid for this deal.

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The Deal: An Alternative Method
November 7, 2021

CLR will pay for the deal with cash. No additional shares will be issued. No dilution.

However, let's see what it would have required if paid in CLR shares at current value.

CLR:

• number of shares outstanding: 365 million
• value of shares after deal announced: $45
• $3.25 billion / $45 = 72 million shares
• 72 / 265 = 20%.

It seems 10% has been about the usual amount of dilution in deals like this.

At 3.0% interest, borrowing the full amount would be almost $100 million on top of the principal. Thus, total new debt: $3.250 billion + $3.350 billion assuming I did the arithmetic correctly.

CLR currently has $4.8 billion in debt. 

Operating cash flow is in the neighborhood of $3 billion.

Levered free cash flow is in the neighborhood of $1.4 billion.

$1.4 / $3.350 = 0.42 (let's call it 0.40).

Definition of levered vs unlevered free cash flow here. 

It seems it would have been fairly easy to pay for this deal with a combination of stock and cash. An all-stock deal would have been painful for mom-and-pop retail investors but not fatal. 

The only way I can get my head around this with regard to cost of the deal and levered free cash flow is think about buying a house. Would I buy a $500,000 house if I had free cash of .... 0.4 x $500,000 = $200,000 and could pay off the house in 2.5 years?

And unlike the house, the Permian deal will likely throw off huge amounts of free cash for many years after the deal is paid for.  

Those numbers are all assuming everything "equal" with one possible exception: the price of oil may actually go up. Makes the deal even more attractive.

Now, throw in the understanding that the deal is immediately accretive, to what extent I don't know, but that would mean the deal could be paid off in less than 2.5 years. 

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Later

This is an interesting way to look at this deal. The best thing, for me, having done this exercise, is there is now a way to track this deal. We can set the bar at 2.5 years to pay off this deal. Operating cash flow, going forward, needs to be above and beyond the cash flow prior to the deal, to cover the $3.25 billion principal and $100 million annual interest payments.

It will be interesting to see if this can be paid off in 2.5 years.