Devon Energy Corp. and WPX Energy Inc. will combine in a $2.56 billion all-stock deal. The combined company, to be named Devon Energy, will hold significant exposure to the Delaware subbasin of the Permian, as well as operations in various liquids-focused US resource plays with production of 277,000 b/d.
Under the terms of the agreement, WPX shareholders will receive a fixed exchange ratio of 0.5165 shares of Devon common stock for each share of WPX common stock owned. The exchange ratio, together with closing prices for Devon and WPX on Sept. 25, 2020, results in an enterprise value for the combined entity of $12 billion. Upon completion, Devon shareholders will own 57% of the combined company and WPX shareholders will own 43% on a fully diluted basis.
The transaction, which is expected to close in first-quarter 2021, has been approved by the boards of directors of both companies. Funds managed by EnCap Investments LP own some 27% of the outstanding shares of WPX and have entered into a support agreement to vote in favor of the transaction. Closing is subject to customary closing conditions, including approvals by Devon and WPX shareholders.
Following the merger, the board of directors will consist of 12 members, 7 directors from Devon and 5 from WPX including the lead independent director. Dave Hager will be appointed executive chairman of the board, and Rick Muncrief will be named president and chief executive officer.
Analysts’ comments
“Consolidation has long been considered one of the key catalysts for improving sentiment for the (US shale) sector, and while the recent strategy shift for the majors has made the prospect of gobbling up the independents at a premium less likely, this transaction certainly sets the bar for the industry to set a more relevant course on its own. We think this transaction answers the call for the sector to identify scale synergies, eliminate costs and improve visibility on capital return, and while the deal does come as a surprise in the current depressed oil price environment, we ultimately think the transaction will be positively received,” said Simmons Energy.
The deal is the first upstream corporate merger of over $1 billion since Chevron’s blockbuster $13 billion agreement to buy Noble last July, noted Andrew Dittmar, senior M&A analyst, Enverus.
“This deal represents the form of shale company consolidation that many across the industry have been looking for. You have two E&Ps with complimentary positions agreeing to an equity exchange at little-to-no premium. The selling point for investors is that the larger combined company will have the scale and efficiencies to navigate a challenging price environment and generate free cash flow for its investors,” Dittmar said.
“The Delaware basin in the Permian is the key overlapping region for the two companies and combined their position will amount to about 400,000 net acres. Both companies bring quality assets in the play to the table, with the deal having the added bonus for Devon of decreasing reliance on federal lands at a time the outlook for future drilling has some question marks,” Dittmar continued.
Such a move by Devon has been expected by Wood Mackenzie for some time, said Alex Beeker, principal analyst, corporate upstream, Wood Mackenzie. “With $1.5 billion in cash on its balance sheet (albeit earmarked for debt reduction), Devon is on a relatively strong financial footing. But Devon has been shrinking fast since its disposal program started in earnest about two years ago. The company’s net production is down 40% since 2018.
“A WPX and Devon tie-up makes sense operationally. We like the diversification WPX brings, particularly mature Bakken production. We do expect the combined budget – if the deal closes – to be less than the sum of the parts, so Devon’s cash flow should improve. WPX has a shallower underlying base decline rate than Devon,” he said.
In the current spending environment, Beeker said, “funding all the parts of a diverse portfolio will prove tough,” and there could be divestment candidates. “We struggle to see Devon funding much more of its joint venture in the STACK. The Eagle Ford is in managed decline. With some selective trimming, a new portfolio could actually mimic that of EOG’s with assets in the Bakken, Eagle Ford, Delaware, and Powder River,” he said.