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Monday, October 19, 2020

Conoco-Concho Deal Announced -- October 19, 2020

The joint letter to stockholders, dated December 11, 2020:

  • COP to issue common shares to complete the merger;
  • Concho shareholders will receive 1.46 shares of COP for each share of Concho;
  • based on average prices, the merger valued Concho at $49.30/share;
  • based on closing prices on day prospectus published, Concho shareholders received $58.36 in COP share value;
    • closing price of CXO, December 30, 2020: $58.26
    • closing price of CXO, October 16, 2020: $48.60
    • closing price of COP, December 30, 2020: $40.00
    • closing price of COP, October 16, 2020: $33.77

Dislaimer: I often misread and misunderstand financial statements, press releases, and news reports. The information on this page will contain typographical and content errors. If this information is important to you, go to the source.

Conoco-Concho deal announced. Links everywhere. Here's one. All stock. $10 billion.

  • 550,000 net acres; $18K/acre

From the linked article:

Adding Concho will dramatically alter Conoco’s production profile. The Midland, Texas-based shale company is entirely focused on the Permian and pumped 319,000 barrels in the second quarter, about six times what Conoco produced there.

The combination will save $500 million a year by 2022, and hand shareholders more than 30 percent of cash from operations through dividends and other distributions, the companies said.

Concho “was an attractive company and had one of the deepest tier 1 resource bases in shale,” analysts at Wells Fargo said in a note. With a deal premium of 15% along with the projected efficiencies, Conoco “seems to be getting a bargain.”

From Bloomberg Intelligence

“With Concho Resources’ stock down more than 40% in 2020, its sale to ConocoPhillips at a 15% premium to the October 13, 2020, close may not assuage holders of a best-in-class Permian E&P that’s generating free cash flow and has less burdensome debt than smaller, independent peers. 
Concho had laid out a reasonable road map of modest production married with capital efficiency, and we thought it would be a consolidator, even given CEO Tim Leach’s history of selling two other iterations of Concho.”

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Others

A good buy for COP:

  • ConocoPhillips is buying Concho Resources in an acquisition valued $9.7 billion, expected to close 1Q21. Concho’s current market capitalization is $9.3 billion.
  • In March 2018 Concho itself paid $9.5 billion for RSP Permian. At year-end 2019, Concho’s reserves had an SEC PV-10 value of $10.6 billion.
  • While oil prices are lower and the trajectory uncertain, COP is buying solid assets in the best U.S. basin at a reasonable cost.

On price, a good deal:

  • ConocoPhillips is upgraded to Buy from Hold with a $40 price target at CFRA in the wake of the company's $9.7B agreement to acquire Concho Resources, which the firm trims to Buy from Strong Buy. 
  • "We estimate the deal at about 6x projected '21 EBITDA, roughly in line with peers, and just a 14% premium relative to closing prices just prior to the [October 14, 2020] rumors of this potential tie-up," CFRA's Stewart Glickman writes. "COP is getting a good price for control of CXO, and significantly boosting its Permian Basin acreage in the bargain." 
  • Conoco would add ~288M shares in the deal, but Concho's projected free cash flow in 2021 - more than $570M - "should more than cover the incremental dividend obligation" of $480M, Glickman says, adding that there is some risk to COP that CXO may attract rival suitors. 
  • On Concho, Glickman is surprised the company's board agreed to the deal since Concho has the advantage of a large acreage position in the Permian Basin and has more time than most peers before significant long-term debt milestone payments arrive.

More sustainable E&P model:

  • Demand destruction and low oil prices have led to more acquisitions in the oil and gas space.
  • The ConocoPhillips purchase of Concho Resources is one of the biggest positive shale movements of late.
  • Headwinds in the form of the coronavirus' trajectory and economic impact make deals more likely.
  • The tie-up also has positive ramifications for an industry coming to terms with ESG investing demands which will only increase.

Bodes well for Permian Basin's long-term outlook:

  • ConocoPhillips' $9.7B deal for Concho Resources marks a strategic departure for the company, which has spent years shedding assets while peers chased aggressive growth, and gives the company a far larger footprint in the Permian Basin.
  • The combined company will be the largest U.S. oil independent, with production in the Permian second only to Occidental Petroleum, according to a J.P. Morgan analysis.
  • "The combination is remarkable. Just in regards to scale, ConocoPhillips is adding enough Permian production to nip at the heels of Exxon Mobil's massive program," said Robert Clarke, a VP at energy consultancy Wood Mackenzie, in a statement. "The combination bodes well for the Permian's longer-term outlook."
  • The purchase bodes well for additional potential M&A targets, including Cimarex Energy, Parsley Energy and Pioneer Natural Resources, Siebert Williams analyst Gabriele Sorbara says.
  • CFRA sees Cimarex, Diamondback Energy, Murphy Oil and PDC Energy as the most likely takeover candidates in the E&P sector.
  • Additionally, Conoco issued a surprise pledge to cut Scope 1 and 2 greenhouse gas emissions from its operations by 35%-45% by 2030 from 2016 levels, and eliminate them by 2050.
  • Once the Concho takeover is completed, Conoco says it will restrict drilling capital to projects that will turn a profit even if crude is trading for less than $40/bbl, which could remove some parts of the company's existing portfolio, such as fields in Alaska and western Canada.
  • Wall Street analysts spoke out favorably on the proposed deal before today's announcement.

Conoco confirms:

  • ConocoPhillips (NYSE:COP) agrees to acquire Concho Resources (NYSE:CXO) in all-stock transaction that values Concho at ~$9.7B.
  • ConocoPhillips says the new merged entity will be the largest independent oil and gas company, with pro forma production of more than 1.5M boe/day.
  • Under the deal terms, each Concho common share will be exchanged for a fixed ratio of 1.46 Conoco shares, representing a 15% premium to closing share prices on Oct. 13, the day before the first reports speculating a potential combination of the two companies.
  • ConocoPhillips and Concho expect to capture $500M of annual cost and capital savings by 2022.

Shale consolidation wave is fully underway

Last year seems so long ago now, but oil and gas people will recall that 2019 was supposed to have been when the big wave of M&A came to consolidate the U.S. shale drilling industry. The trend was building in April of last year, when Chevron and OXY spent a month fighting over who would win the chance to overpay for Anadarko Petroleum. Oxy won that competition and landed Anadarko for $55 billion — a princely sum that sparked speculation over who would sell next, and for the winning bidder was pounded by the market for having overpaid, but speculation about more consolidation - especially among the big players in the oil-rich Permian Basin - only continued to ramp up. Surely, more big deals were coming, and soon.

Well, “soon” turned out to be 15 months later, in July of this year, when Chevron was able to land the big fish it had been seeking in its $13 billion deal to acquire another large independent Permian player, Noble Energy NBL +1.4%. After Oxy’s deal for Anadarko failed to impress investors, more than a year had gone by in the shale patch without a single truly large M&A transaction taking place.

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