Shale Drillers Cabot, Cimarex to Merge in $7.4 Billion Deal

Cabot Oil & Gas Corp. agreed to merge with Cimarex Energy Co., disappointing investors with little overlap in the combination of two mid-tier shale drillers in an all-stock transaction valued at about $7.4 billion.

The deal will give Cabot shareholders about 49.5% of the combined entity, with Cimarex shareholders holding the rest, the companies said Monday in a statement. In common with other recent industry mergers, the combination of Cabot and Cimarex is an almost zero-premium deal. Shares for both companies tumbled more than 7%, marking their biggest intraday declines in more than a year.

Cimarex “shareholders are only receiving a 0.4% premium despite COG trading at nearly twice the multiple in 2022,” Leo Mariani, an Austin-based analyst at KeyBanc Capital Markets Inc., wrote Monday in a note, downgrading the Cimarex shares from the equivalent of a buy to a hold. “COG and XEC also have no acreage overlap, which results in no clear strategic benefit to XEC’s shareholders and precludes the two companies from realizing any operational synergies, unlike other recent deals in the space.”

U.S. shale drillers are getting increasingly acquisitive following a sustained recovery in energy prices from the lows seen in 2020. They’re also responding to investor pressure to improve financial and operational performance after a dismal few years.

The Cimarex-Cabot deal addresses investor demands with a heavy emphasis on returning of cash: with plans to pay a 50-cent-per-share special dividend on the closing of the deal, while introducing a quarterly variable dividend, on top of a regular payout every three months.

“When you look at the stability of our combined cash flow through commodity cycles, you just have to say, ‘Wow,’” Chief Executive Officer Tom Jorden told analysts and investors Monday on a conference call. “We’re building an ark, not a party boat, and this new company is an ark.”

Combining Cabot, which operates in the Marcellus shale basin in Appalachia, and Cimarex, which drills in the Permian and Anadarko basins, will lead to the elimination of about $100 million in annual costs, according to both companies. The newly merged energy producer will be renamed and be based in Houston.

“A Permian-focused partner would have made far more sense” for Cimarex, Bloomberg Intelligence analysts Talon Custer and Vincent G. Piazza said in a note. “Still, the new E&P will generate robust free cash flow, enhance shareholder distributions and mitigate federal leasehold risk.”

The Cabot-Cimarex merger is the largest U.S. oil and gas deal since Chevron Corp.’s acquisition of Noble Energy Inc. last year, according to data compiled by Bloomberg.

Cimarex investors will receive 4.0146 shares of Cabot common stock for each share of Cimarex common stock owned, The transaction is expected to close in the fourth quarter, subject to regulatory clearance, shareholder approval and other customary closing conditions.

©2021 Bloomberg L.P.

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