The merger of equals between Devon Energy Corp. and WPX Energy Inc. will create an oil and gas producer with a "dominant position" in the Permian Basin, the two companies said Sept. 28.
The all-stock deal, which has a net worth of approximately $12 billion, combines two prominent operators in the Permian's Delaware Basin. Being one of the largest producers in that unconventional play, Devon President and CEO David Hager said, has positioned the expanded company in a position to succeed in a difficult market.
"Devon has all the necessary attributes required to successfully navigate and flourish in today's environment, and the company has [been] built to create value for many years to come," Hager said on a call with investors after the deal was announced. "This view is underpinned by our dominant position in a world-class Delaware Basin which is supported by high-margin resource plays in many of the best basins in the U.S."
Once the merger is complete ― likely in the first quarter of 2021 ― the larger Devon Energy will control approximately 400,000 net acres in the Delaware, with production of approximately 277,000 barrels of oil per day. That acreage will account for about 60% of the new company's production, and WPX CEO and Chairman Richard Muncrief said it would be the "capital-efficient growth engine of the company."
"The consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at our current combined activity level of 17 operated drilling rigs," Muncrief said. "Our combined acreage position resides in the economic heart of the play where drilling results have delivered a powerful combination of the best well productivity, highest oil mix and the lowest operating costs."
Muncrief said as the companies combine and share best practices, the expanded Devon will be increasingly efficient in the Permian.
"We have the right acreage, the proven ability to execute … to continually deliver industry-leading results for the foreseeable future," he said.
Devon and WPX struck first in an environment where consolidation looks increasingly likely, and the deal met with largely positive reviews. The combination of the two companies, along with promises to retain a conservative approach to growth, met with analyst approval.
"Management has committed to reinvesting ~75% of operating cash flow with a maximum production growth of 5%. At first glance, we see the deal as widely positive for both entities and expect approval by both entities' shareholders," John Freeman of Raymond James said. In its note on the merger, Moody's noted that the combined company is increasing its overall debt by taking on WPX's $3.3 billion, but its strength in the Permian should more than offset that concern.
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"The benefits including enhanced scale and potential synergies should more than offset the negative effect on Devon's debt balances due to WPX's existing debt outstanding being combined into the relatively larger Devon," the firm said. "The asset base is a good strategic fit, significantly increasing the combined company's Delaware Basin scale, and a new Williston [Basin] position adds to Devon's U.S. shale diversification."
Siebert Williams Shank & Co. Analyst Gabriele Sorbara said shareholders have multiple reasons to like the merger, including reducing the percentage of overall production and acreage on federal lands. Previously, approximately 55% of Devon's Delaware Basin inventory and 60% of its Powder River Basin inventory was on federal lands; with the addition of WPX's acreage, the percentage of Delaware Basin inventory on federal lands will drop to approximately 35%.
Democratic presidential candidate Joe Biden has said he would halt new oil and gas drilling on federal lands if elected.
"[The deal] places the pro forma company among the largest in the E&P sector with 276.7 Mbbls/d (~55% DVN/~45% WPX)," Sorbara said. "[It]
In the wake of the proposed merger announcement, Devon shares jumped nearly 12% to $9.88 per share in early afternoon trading on the New York Stock Exchange. WPX shares were up more than 15% to $5.12 per share.
