ConocoPhillips to Buy Permian Shale Producer Concho Resources in All-stock Deal

[Editor’s note: This story was updated at 12:37 p.m. CT Oct. 19.]

ConocoPhillips Co. agreed to acquire Permian Basin shale producer Concho Resources Inc. on Oct. 19 in an all-stock transaction valued at $9.7 billion.

The announcement confirmed reports made roughly a week ago of a potential deal and also continues a wave of consolidation across the E&P space, which has largely been shunned by investors due to the sector’s reputation of generating poor returns. The trend is expected to continue as many believe it signals a path forward for the troubled U.S. shale patch.

“The leadership and boards of both companies believe today’s transaction is an affirmation of our commitment to lead a structural change for our vital industry,” ConocoPhillips chairman and CEO Ryan Lance said in a statement on Oct. 19.

The transaction is the largest upstream merger entirely focused on shale since BHP bought Petrohawk for $15 billion in 2011, according to Enverus Senior M&A Analyst Andrew Dittmar.

“Conoco’s patience waiting for the right deal appears well rewarded as the company is picking up one of the premier positions in the Permian at a fraction of the cost of other large deals in the basin over the last few years on a dollar per acre basis,” Dittmar said in a statement.

Based in Midland, Texas, Concho Resources is one of the largest unconventional shale producers in the Permian Basin, with a roughly 800,000 gross (550,000 net) acre position in both the Delaware and Midland sub-basins. The fifth-largest producer by volume in the Permian Basin, the company’s total production for the second quarter was 319,000 boe/d.

Together, the companies will have about 700,000 net acres in the Permian Basin. The expanded Permian position provides a strong complement to ConocoPhillips’ other globally diverse, low-capital-intensity legacy positions, according to a joint release from the companies.

Upon closing, Concho’s chairman and CEO, Tim Leach, will join ConocoPhillips’ board of directors and executive leadership team as executive vice president and president of Lower 48. 

“From our position of strength and in light of market trends, our board of directors and management team evaluated a wide range of options and unanimously determined that combining with ConocoPhillips is the best path forward for Concho and our shareholders,” Leach said in an Oct. 19 statement.

The deal swaps 1.46 shares of ConocoPhillips for each Concho share, which Dittmar described as a moderate premium of 15% to Concho’s share price before rumors of a deal began to swirl on Oct. 13. Concho shares the morning of Oct. 19 were up a fraction at $48.65.

The combined company will have an approximately $60 billion enterprise value. Additionally, the companies expect to capture $500 million of annual cost and capital savings by 2022.

The new ConocoPhillips will also be the largest independent oil and gas company, with pro forma production of over 1.5 million boe/d. In addition, to its “core-of-the-core” acreage positions in the Permian Basin, the company will have leading positions in the Eagle Ford and Bakken in the Lower 48 and the Montney in Canada.

Lance continued, “Opportunities to consolidate quality on the scale of these two companies do not come along often, so we are seizing this moment to create a company to lead the necessary transformation of our vital sector for the benefit for all stakeholders in the future.”

In total, over $30 billion in announced E&P mergers are now on the books for 2020 including two deals over $10 billion. Even after this year’s merger activity, Dittmar believes there is still room left for the shale industry to consolidate. A limiting factor, he said, will be the number of attractive sellers and buyers available.

“Even the total dollar amount transacted significantly understates the scale of consolidation going on in the industry given still depressed equity prices relative to past years,” he said adding, “this is a historic turning point in the development of U.S. unconventional resources.”

Dittmar sees other well-positioned independents in the Permian Basin with reasonable debt loads the most likely best prospects for a deal.

In light of the pending acquisition, ConocoPhillips said it has suspended share repurchases until after the deal closes. The transaction, subject to the approval of both ConocoPhillips and Concho stockholders, is expected to close in first-quarter 2021.

Goldman Sachs & Co. LLC is exclusive financial adviser to ConocoPhillips for the transaction, and Wachtell, Lipton, Rosen & Katz is serving as its legal adviser. Credit Suisse Securities (USA) LLC and J.P. Morgan Securities LLC are financial advisers to Concho. Sullivan & Cromwell LLP is legal adviser to Concho.