ConocoPhillips (COP) announced Monday that it will buy Permian Basin shale company Concho Resources (CXO) in the largest energy deal so far this year.


ConocoPhillips will buy Concho in an all-stock deal valued at $9.7 billion, with Concho shareholders receiving 1.46 Conoco shares for each share of Concho they own. The deal creates a company with a $60 billion enterprise value.

The combined company will have 23 billion barrels of oil equivalent with less than $40 per barrel WTI cost of supply and an average cost of supply below $30 per barrel WTI.

“The combination is remarkable. Just in regards to scale, ConocoPhillips is adding enough Permian production to nip at the heels of ExxonMobil’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.”

As of September, Concho had 800,000 gross acres in the Permian. Conoco has 10.3 million net acres in the continental U.S. with a focus on the Eagle Ford, Bakken and Permian Basin.

The takeover will make ConocoPhillips one of the biggest Permian Basin producers and the largest U.S. independent oil company, producing 1.5 million barrels per day, according to Reuters.

But Edward Jones analyst Jennifer Rowland said the environment still remains difficult for takeovers in the oil and gas sector overall.

“Like the COP/CXO deal, a transaction needs to be either neutral to leverage or deleveraging, based on a small premium and additive to free cash flow at a relatively low oil price,” she wrote in a note. “Any deal that requires significant cost savings or a higher oil price to justify the price paid will not be well-received. I think the hurdles remain high for broad-scale consolidation.”

ConocoPhillips shares dipped 0.3% to 33.68 on the stock market today. Concho edged up 0.1% to 48.66. Exxon Mobil (XOM) shares dipped 0.3%.

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Mergers In The Permian Basin

Last month, Devon Energy (DVN) announced it would buy WPX Energy (WPX) for $2.56 billion to expand its acreage in the Delaware Basin area of the Permian Basin. That follows Occidental Petroleum‘s (OXY) purchase of Anadarko Petroleum last year for $38 billion, which also made it a big Permian Basin player.

The wave of bankruptcies in the shale patch make it ripe for merger opportunities. Demand for oil has weakened during the coronavirus pandemic and companies are finding ways to survive the downturn.

“It’s a fight for survival right now with these low oil prices,” said Phil Flynn, senior market analyst for the Price Group.

But the moves are also setting up for the energy landscape post Covid-19. Earlier this month the International Energy Agency warned that the U.S. shale industry will look very different from the one that entered into the coronavirus pandemic.

Flynn said that natural gas, not oil, will be one of the most important fuels in the next 25 years.

“Some of these bets on shale players are not just looking at oil, but also natural gas.”

Follow Gillian Rich on Twitter @IBD_GRich for energy news and more.


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