ConocoPhillips has agreed to buy Concho Resources Inc. for roughly $ 9.7 billion in shares, the largest shale oil deal since a sharp drop in energy demand earlier this year, and will build a rig in America's most fertile oil field.
Investors will receive 1.46 Conoco shares for every Concho share, the companies said in a statement on Monday. The deal represents a 15% premium over the closing price of Concho on October 13, the last trading session before the companies were announced to be in talks.
The fall in prices fueled by the pandemic and a weak global economic recovery have intensified consolidation in the shale sector, which is under severe financial stress after years of debt-fueled growth. The combination of Conoco and Concho will become one of the dominant operators in the Permian Basin of West Texas and New Mexico, competing only with companies such as Occidental Petroleum Corp. and Chevron Corp. in terms of oil production.
This is Conoco's largest deal under the leadership of its current CEO Ryan Lance, who has so far tried to position the company as a near-shale-free option for Wall Street by touting near-zero growth, stable cash flow and disciplined spending.
While Lance made no secret of his desire to take advantage of the downturn to boost shale oil production, he said in July that any deal must meet Conoco's criteria to have low supply costs and be able to compete with the rest of the company's portfolio.
Houston-based Conoco emerged from the oil crisis in a relatively strong position with around $ 7 billion in cash. He recently resumed share buybacks. But the prospects for its growth are dubious: production in the second quarter fell by almost 25% from the previous year after the company joined many other US drillers in cutting production in response to lower prices.
The addition of Concho will dramatically change its manufacturing profile. The Midland, Texas-based shale company is wholly focused on the Permian Basin and produced 319,000 barrels in the second quarter, about six times more than Conoco produced there.
The companies said the merger would save $ 500 million a year by 2022 and would transfer more than 30 percent of operating cash to shareholders in the form of dividends and other payments.
The Conoco-Concho deal could also signal further mergers and acquisitions in the sector. While there is a compelling case for more consolidation to cut costs, the lack of cash and Wall Street's antipathy towards the sector is hampering deals.
But since oil is stable at around $ 40 a barrel, there are signs that the number of mergers and acquisitions may increase. Chevron Corp. completed the acquisition of Noble Energy Inc. in early October, and at the end of September Devon Energy Corp. announced the purchase of Perm operator WPX Energy Inc. Unlike some of the shale deals in 2019, Devon's collaboration with WPX was well received. and both companies agreed on a small premium for the deal.
Goldman Sachs Group Inc. is financial advisor to Conoco on the transaction and Wachtell, Lipton, Rosen & Katz is its legal advisor. Credit Suisse Group AG and JPMorgan Chase & Co. are financial advisors to Concho and Sullivan & Cromwell LLP is its legal advisor.
Concho remained largely unchanged at $ 49 at 7:23 am in pre-sale in New York, as did Conoco at $ 33.80.