International

ConocoPhillips to buy Concho Resources for $9.7 billion in 2020 top shale deal

Published on : 2020-10-19

(Reuters) - ConocoPhillips on Monday agreed to buy U.S. shale oil producer Concho Resources Inc for $9.7 billion, as the energy sector continued to consolidate amid lower fuel prices and demand.

The, low-premium, all-stock deal comes as many U.S. shale companies have been mired in losses due to weak crude prices and, unlike in past downturns, have struggled to raise new capital to restructure heavy debts.

The purchase would propel ConocoPhillips to the ranks of the top producers in the Permian Basin, the prime U.S. oilfield that stretches from West Texas to southeastern New Mexico. It also would make it the largest U.S. independent, pumping 1.5 million barrels per day (bpd).

The fifth-largest producer by volume in the Permian, Concho pumps about 319,000 bpd, from wells spread across more than half a million acres. Conoco is a major producer in two other U.S. shale fields, but pumps about 50,000 bpd in the Permian.

“Concho has been on the short list of big Permian companies attracting interest due to its large production, vast acreage and relatively low debt,” said Andrew Dittmar, M&A analyst at consultancy Enverus.

It has scant drilling acreage on federal lands, a plus given Democratic party presidential candidate Joe Biden’s proposal to ban new fracking permits on government property, he said.

The sector has been consolidating after many shale producers borrowed in a bet on higher prices. Prices tanked instead, leaving shale investors with little to show for the rising output and companies struggling to pay down debts.

The deal values Concho at $49.30 per share, 1.4% above Friday's close, and continues a trend of all-stock, low premium combinations, including the WPX Energy-Devon merger and Chevron Corp CVX.N's purchase of Noble Energy.

ConocoPhillips said the premium was 15% based on Concho’s price on Oct. 13, before news reports on the deal talks surfaced.

Concho had $3.9 billion in long-term debt at the end of June, and has not posted an annual profit since 2018. Its second quarter loss was $435 million, wider than a loss of $97 million a year earlier.

The combined company will hold about 23 billion barrels of oil equivalent resources with an average cost of supply of below $30 per barrel of U.S. West Texas Intermediate crude, Conoco said.

Concho shareholders will receive 1.46 shares of ConocoPhillips for each share held.

The deal is expected to provide $500 million in annual cost and capital savings by 2022.

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