Devon to Buy WPX After Permian Investors Push for More M&A

(Bloomberg) -- Devon Energy Corp. agreed to acquire WPX Energy Inc. in a $2.56 billion all-stock deal, creating one of the largest independent U.S. shale producers and answering investor calls for consolidation at a time of crisis for the sector.

The transaction, which includes a deal premium of about 2.6%, will see Devon shareholders own approximately 57 percent of the combined entity, the companies said Monday in a statement. Shares of Devon and WPX surged, indicating investor enthusiasm for the deal.

The plunge in oil prices this year, which has left much of the shale industry unprofitable, has added to the impetus for mergers and acquisitions, particularly in the Permian, where scores of producers operate in close physical proximity.

U.S. shale investors are frustrated after years of poor returns and missed targets. Many have called for the sector to consolidate in order to slash costs, and some have advocated for low- to no-premium deals to get them across the finish line. Stock prices have been hammered, and companies with market values of less than $5 billion are losing relevance with public investors, according to analysts at Tudor, Pickering, Holt & Co.

“The bar for investment is rising daily -- with most long-only clients we speak with now leaning towards a $10 billion minimum market cap for investment,” the analysts wrote in a note Monday. “We believe the public markets would like to see the U.S. upstream sector drop down to 10-15 companies, most of which will likely consolidate through low premium stock-for-stock merger of equals.”

Cimarex Energy Co., PDC Energy Inc. and Parsley Energy Inc. could be targets in the future, according to both Johnson Rice & Co. analyst Charles Meade and the analysts from Tudor. ConocoPhillips, EOG Resources Inc. and Marathon Oil Corp. are potential buyers, they said.

The combination of Devon and WPX will tie together two companies with sizable operations in the hottest part of the prolific Permian Basin, which straddles West Texas and southeastern New Mexico.

The combined company will produce 60% of its output in the Delaware sub-basin of the Permian, which is home to some of the lowest breakeven costs in the country. It will retain the Devon name and be led by Rick Muncrief, Tulsa-based WPX’s current chief executive officer. Oklahoma City-based Devon also plans to initiate a so-called fixed-plus variable dividend, which comprises a quarterly payout of 11 cents a share and the distribution of up to 50% of the remaining free cash flow. The takeover is expected to close in the first quarter of next year.

“Bringing together our asset bases will drive immediate synergies and enable the combined company to accelerate free cash flow growth and return of capital to shareholders,” Devon CEO Dave Hager, who will become executive chairman, said in the statement.

Devon jumped as much as 12% and traded at $9.91 at 12:20 p.m. in New York, while WPX was up 16% at $5.17.

Bonds issued by both companies also climbed. WPX’s 5.875% notes maturing in 2028 rose 8.5 cents on the dollar to 106.5 cents, a record high. Devon’s 5% bonds maturing in 2045 gained 2.4 cents to 95.6 cents.

What Bloomberg Intelligence Says

The Devon Energy-WPX Energy merger may result in a credit profile that enables S&P to revise its outlook on Devon’s BBB- ratings to stable from negative, eliminating the risk that it becomes energy’s next fallen angel.

--Spencer Cutter, senior credit analyst

Click here to read the the report

The merger comes after Chevron Corp. agreed to buy Noble Energy Inc. in July for about $5 billion, though that deal wasn’t just about Chevron acquiring additional U.S. shale assets but sizable natural gas operations in the Eastern Mediterranean as well. A Devon-WPX combination is the most significant transaction between two independent U.S. producers since WPX bought private equity-backed Felix Energy in March.

The deal also addresses Devon’s exposure to federal acreage, according to Gabe Sorbara, an analyst at Siebert Williams Shank & Co. LLC. That’s particularly important just a month out from the U.S. presidential election, with Democratic nominee Joe Biden vowing to ban all new fracking on federal lands if he wins.

Devon and WPX both have significant operations in the Delaware sub-basin. Much of the Delaware, however, is located within lands owned by the federal government, and Devon has been fielding analyst questions for months about the potential impact of a Biden presidency. WPX has a smaller percentage of its acreage on federal lands, Sorbara said.

Devon’s financial adviser on the deal is JPMorgan Chase & Co., and Skadden, Arps, Slate, Meagher & Flom LLP is its legal adviser. WPX’s financial adviser is Citigroup Inc. and its legal adviser is Kirkland & Ellis LLP. Vinson & Elkins LLP is legal adviser to EnCap Investments LP, which holds a 27% stake in WPX.

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