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Concho (CXO) Inks Mega $9.5B Deal to Acquire RSP Permian

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Concho Resources Inc. (CXO - Free Report) , an upstream player, recently signed a deal to acquire its rival RSP Permian Inc. in an all-stock deal of $9.5 billion, to expand its presence in the prolific Permian play.

The agreement marks the largest takeover in the oil and gas industry since 2012 and the biggest pure-Permian deal ever. The acquisition is set to create a humongous Permian Pure-play and likely to make Concho one of the top energy producers in the Permian basin.

Post the announcement of the deal, shares of RSP Permian increased more than 15.6% to close at $45 on Mar 28. On the other hand, shares of Concho declined more than 8.7% to close at $143.25 on Mar 28, being the biggest loser on the S&P 500 index for the day. This reflects investors’ disappointment toward the pricey deal, considering Concho is paying a hefty premium for RSP’s shares. According to some reports, the overall price tag of the deal at $9.5 billion implies Concho paying more than $76,000 per acre, which is much higher than other deals in the Permian region with companies paying around $40,000 per acre, according to certain estimates. However, many analysts still find the premium reasonable owing to the synergies associated with the deal and the long-term opportunities it could provide.

Deal Details

The deal is valued at $8 billion in equity wherein Concho will exchange 0.32 shares of its common stock for each share of RSP. Concho’s bid represents 29% premium to RSP Permian’s closing share price of $38.92 on Mar 27, thus valuing RSP Permian at $50.24 a share. The deal also assumes RSP Permian’s net debt estimated at $1.5 billion, thus pushing the total value of the transaction to $9.5 billion.

Subject to satisfactory closing conditions, along with shareholders’ consent and other regulatory approvals, the deal is set for closure by the third quarter of 2018.

Post the culmination of the deal, Concho will own 75% stake in the combined entity, whereas RSP Permian will hold the remaining 25% interest.

Deal Motive  

Concho’s core operations are focused on the prolific Permian basin, providing this large-cap upstream player with an enviable acreage of low-risk top-tier assets and a multiyear drilling inventory. The company has successfully streamlined its portfolio by divesting its non-core assets like Ward and Reeves among others, thereby sharpening its focus on prolific Permian Basin. The company produced more than 193,000 barrels of oil equivalent per day in the region last quarter.

On the other hand, Dallas-based oil and gas producer, RSP Permian is one of the biggest oil and gas explorers in the region. The company’s production during the fourth quarter stood at 55,000 barrels of oil equivalent per day, with 80% weighted to oil and 20% to natural gas. RSP Permian’s acreage carries a resource potential of around 2.2 billion of barrels of oil equivalent.  

The complementary asset base has been the key driver of the deal. The buyout will integrate the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the region. The deal will enable the companies to pool their expertise in the region and share their best practices, thereby enhancing buying power in securing services in the region.

Deal Benefits

The deal adds 92,000 acres of complementary holdings to Concho’s Permian portfolio, expanding the total Permian acreage of the company to 640,000 net acres. The combined entity is set to run 27 rigs in the region, marking one of the largest drilling programs in the Permian shale play.

Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of asset, systems and staff. The deal is expected to result in operational synergies of more than $2 billion along with annual corporate savings amounting to $60 million. The deal is expected to be immediately accretive to Concho’s earnings, cash flow and net asset value. Further, it will also enhance the Zacks Rank #1 (Strong Buy) company’s estimated compounded annual growth rate over the 2017-2020 time frame. You can see the complete list of today’s Zacks #1 Rank stocks here.

Permian Play: The Hotspot for Oil Explorers

Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin compared to most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the United States. The region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters make year-round work possible. Oil production in the region has been witnessing significant growth with current capacity of churning around 3 million barrels per day(Bpd), which is expected to rise by another 2 million Bpd by 2025.

Last year, there had been a flurry of oil deals in the region owing to its attractive economics. Supermajor ExxonMobil Corporation (XOM - Free Report) doubled its Permian acreage with a $6.6 billion deal, holding more than 1 million acres in the region last year. Other companies including Noble Energy Inc, Parsley Energy Inc., Marathon Oil Corporation had inked strategic deals in 2017 to expand their Permian foothold. Oasis Petroleum Inc. (OAS - Free Report) also dived into Permian with $946 million acreage buyout in December 2017.

Further, now with crude prices finally rebounding to trade above $60 per barrel since a couple of months, more and more oil producers are likely to enhance or capitalize their Permian portfolio, increase shareholders return and reduce cost. The latest deal is likely to spur the “Permania” that has engulfed the U.S. oil industry and herald another consolidation wave in the Permian region. Small and mid-cap companies operating in the region including Abraxas Petroleum Corporation, Jagged Peak Energy Inc., Lilis Energy Inc., Resolute Energy corporation among others could become effective targets for consolidation. In fact, the deal has also set some sort of benchmark that the companies might require to pay heed to for clinching an acquisition deal in the Permian region. However, with its relatively low break-even cost, the hectic pace of land grab is set to continue in the Permian basin.

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