By: Paul Takahashi – Houston Chronicle – ConocoPhillips has long eschewed mergers and acquisitions in favor of disciplined spending and steady, organic growth.
The Houston oil giant on Monday found itself advocating for the very thing it has cautioned investors about: a $9.7 billion takeover of a rival, Concho Resources. The acquisition would create the largest independent oil and gas company nationally and a dominant operator in the Permian Basin of West Texas and southeastern New Mexico.
“We believe that sector consolidation is both necessary and inevitable; however, today’s transaction is not just another industry deal,” ConocoPhillips CEO Ryan Lance told analysts in a conference call Monday. “Neither of us needed to do a transaction to fill a gap in our portfolio or fix something. Instead, (ConocoPhillips and Concho) are jointly making a commitment to lead what we believe is a structural change to our industry.”
Oil and gas companies, mired in an industry downturn and facing a transition toward renewable energy, are increasingly looking to pool resources and cut redundancies. Earlier this month, Chevron Corp. completed its acquisition of Houston-based Noble Energy, and in late September Devon Energy said it was buying Permian operator WPX Energy.
ConocoPhillips’ pursuit of Concho reflects the growing trend despite the risk of alienating investors concerned about company spending and dwindling returns during the downturn. Investors since 2018 have pulled out of the energy sector, the worst performer of the S&P 500 stock index.
Lance and Concho CEO Tim Leach sought to reassure investors Monday that consolidation in their case was the most prudent decision for shareholders. They said they remained committed to increasing shareholder dividends, returning 30 percent of free cash flow back to shareholders.
They said the combined company, valued at $60 billion with access to 23 billion barrels of crude reserves, would create a force in the industry. The consolidation, they added, would save the combined company $500 million annually by 2022. They touted the new company’s balance sheet, with $7 billion in cash on hand and access to a $6 billion credit line. Combined, the two companies would have $12 billion of debt with $2 billion coming due over the next two years.
“We share a consistent view of what it takes to succeed in this exploration and production business and bring investors back into this sector,” Lance said. “It’s about low cost of supply, it’s about a really strong balance sheet, it’s about having a rational way to allocate capital that focuses on returns and doesn’t just chase growth, it’s about distributions back to shareholders. This transaction we announced today greatly enhances that plan.”
“Concho is running a great business and hitting on all cylinders, but I think size and scale are the driving factors today,” Lynch told analysts Monday. “The size and scale we are today … it’s hard to distribute cash back to shareholders as rapidly as we can in this new model.”
The acquisition also will enhance ConocoPhillip’s shale plays in the Permian Basin, the Eagle Ford in South Texas, and the Bakken in North Dakota. Concho pumped 319,000 barrels in the Permian during the second quarter, about six times what Conoco produced there. The shale driller also has acreage in the Montney oil sands of Canada.
The transaction, subject to approval by ConocoPhillips and Concho shareholders as well as regulators, is expected to close in the first quarter of 2021.
Under the terms of the deal, investors will get 1.46 Conoco shares for each Concho share. The all-stock transaction represents a 15 percent premium over Concho’s closing price Oct. 13, the last trading session before Bloomberg broke news of negotiations between the two companies.
After closing, Leach will join ConocoPhillips’ board of directors and its executive leadership team as executive vice president and president of the company’s operations in the lower 48 states.
ConocoPhillips’ shares fell 3.2 percent to $32.70, while Concho shares fell 2.8 percent to $47.26 on Monday.