Any lingering doubts about the wave of consolidation engulfing the US oil and gas industry were put to rest by ConocoPhillips’ all stock deal for Concho Resources on Monday.
Valued at $13.3bn including debt, this is not only the year’s biggest deal but the third major transaction in the US shale industry in under three months. All three — struck at little or no premium — offer a marked contrast to Occidental Petroleum’s pricey $55bn acquisition of Anadarko Petroleum last year. It is true, patience is a virtue.
Like Chevron, which agreed to buy Noble Energy in July in a $13bn transaction, Conoco is taking advantage of its relatively strong balance sheet to hoover up bargains. An oil price that has stabilised at about $40 a barrel should also make the case more compelling for investors.
Conoco’s offer — worth about $49.30 a share — represents just a 15 per cent premium to Concho’s closing price on October 13, before news reports on the deal talks surfaced. In return, it is buying one of the biggest shale players in the oil-rich Permian Basin. The acquisition will immediately catapult Conoco to the number three spot in US shale production. Its expected 2020 output of 465,000 barrels per day will surpass Occidental’s and put it just behind Chevron and EOG Resources, according to energy consultancy Wood Mackenzie.
Concho — whose shares were trading at $158 just two years ago — has relatively little debt. Net debt of $3.6bn is some 1.3 times expected ebitda for this year. Another attraction: few of Concho’s wells are on federal lands. This could become a significant advantage if Joe Biden wins the US presidency in November and follows through with his proposal to ban new fracking permits on government property.
Taxed and capitalised, the $500m of annual cost savings forecast by Conoco are worth as much as $4bn. That is about 40 per cent the equity value of the acquisition, suggesting that Conoco has got a great deal.
For Conoco investors, the main downside to Monday’s news is that they will have to wait a little bit longer for share buybacks to start again. The company said that its stock repurchase programme would remain suspended until the first quarter of next year, when it expects the Concho deal to close. The muted reaction in Conoco shares suggests investors believe that it will pay to wait.
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