ConocoPhillips is acquiring Permian heavyweight Concho Resources in an all-stock deal for $49.30 per share (total equity value of $9.7 billion) and a total enterprise value of $13.3 billion. The acquisition adds 550,000 net acres in the Permian (350,000 Delaware acres and 200,000 Midland acres) plus 200,000 bbl/d oil output and 719 MMcf/d gas production for 2Q20 to Conoco’s portfolio, increasing Permian output six-fold. Only 20% of Concho’s leasehold is located on federal land.
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“Concho Resources is one of the premier acquisition targets among U.S. shale drillers and Conoco is on a very short list of potential buyers, so this deal looks to be a natural fit on both sides,” said Enverus M&A analyst Andrew Dittmar. The $13.3 billion acquisition is the largest upstream deal entirely focused on shale since BHP bought Petrohawk for $15.1 billion in 2011.
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“Buying Concho strategically fills a gap in Conoco’s portfolio. While well positioned in multiple U.S. plays like the Eagle Ford and Bakken plus internationally, Conoco lagged rivals in the Permian,” added Dittmar. “Conoco’s patience waiting for the right deal appears well rewarded as the company is picking up one of the premier positions in the Permian at ~$10,000/acre or a fraction of the cost of other large deals in the basin over the last few years.”
An important factor when evaluating potential merger targets in the current market are debt loads. Acquirers don’t want to stress their own balance sheets by taking on targets with excess debt. Again, Concho registers well in this category with debt comprising less than 30% of total transaction enterprise value.
Like the other corporate consolidation deals in 2020, the consideration to Concho shareholders is entirely stock. One difference is that this deal does include a moderate premium of 15% to Concho’s share price before rumors of a deal began to swirl on October 13th. That is in contrast to 2020’s other corporate deals, which have been for essentially no premium. Concho was trading at enough of a discount to its intrinsic value that Conoco is able to pay this premium and still see the deal as accretive to its shareholders.
The deal looks beneficial to Concho owners, giving them a piece of a more diversified asset base that includes significant Alaska and international exposure in addition to shale. The addition of conventional assets lessens the base decline rate and makes it more straight forward to return capital to shareholders. Conoco’s pre-deal stock price and payout implies a dividend yield of around 5%. The combined company will target returning 30% of cash from operations to shareholders through ordinary dividends and additional distributions.
With over $30 billion in announced E&P mergers now on the books in 2020 including two deals over $10 billion, shale consolidation is well underway. Even the total dollar amount transacted understates the scale of consolidation going on in the industry given still depressed equity prices relative to past years. Over 1.0 Mboe/d of production and 1.6 million net acres have changed hands in four corporate deals year-to-date.
“Even after 2020’s merger activity, there is still room left for the industry to consolidate,” commented Dittmar. “The limiting factor will be the number of attractive merger partners available, both on the seller and acquirer side.”
The relative scarcity of attractive deals may place additional pressure on some companies to get a transaction in place and lead to more activity in the near term. Some of the other well-positioned independents in the Permian with reasonable debt loads are likely the best prospects for a deal.