With investor sentiment having been strongly against any moves that would increase debt for independent oil and gas producers, mergers and acquisitions have become risky propositions. But two of the more recent deals to close are meeting with positive reactions from analysts and investors alike.

In October 2020, Pioneer Natural Resources Co. reached an agreement to acquire Parsley Energy Inc. for $7.6 billion, making it the largest pure-play producer in the Permian Basin. Pioneer, already a force in the Permian's Midland Basin, added more acreage in that play along with Parsley's position in the Delaware Basin through the deal, which closed Jan. 12.

"The logic behind the transaction is simple and we believe both the financial merits and strategic rationale are strong," Pioneer CEO Scott Sheffield said when the deal was announced. "The combination of our two high-quality Permian companies is focused on creating tangible and durable value for shareholders in the long term, with a primary focus on free cash flow."

That argument resonated with most analysts, who believe the expanded Pioneer is in a position to thrive with the addition of Parsley's assets, particularly those that border the company's existing holdings in the Midland Basin.

"The new Pioneer isn't that different from the old Pioneer; it has the same assets, just more of them," KeyBanc analyst Leo Mariani said in a Jan. 15 interview. "They have overlapping acreage and should have good synergies. It's just more efficient to basically develop it all as one big area instead of a bunch of small areas."

Sheffield's comments on free cash flow also caught the attention of observers, who noted how Pioneer's approach to spending has changed significantly since the oil price collapse of 2014 to 2016.

"Historically one of the shale industry's more profligate capital allocators, Pioneer is now a poster child for capital discipline and intends to reinvest only 65%-75% of cash flows," Morningstar analyst David Meats said Jan. 15. "Much of the remainder will be redistributed to shareholders via a variable dividend that will keep payouts calibrated with the commodity cycle, setting an example all peers should follow."

The merger with Parsley, along with an increase in oil prices, has proven to be beneficial for Pioneer's share price. The company's stock on the New York Stock Exchange closed at $83.53 per share on Oct. 20, 2020, just prior to the deal being announced; it closed at $132.13 per share on Jan. 20, 2021, up more than 58% in three months.

In late September 2020, Devon Energy Corp. and WPX Energy Inc. agreed to a $12 billion merger of equals. In his explanation of the reasoning behind the merger, which closed Jan. 7, Devon Executive Chairman of the Board David Hager pointed to the combined company's Permian holdings as a driving factor.

"This strategic combination will create one of the largest unconventional oil producers in the U.S. with an asset base underpinned by a premium 400,000 net acre position in the economic core of the Delaware Basin," he said. "The combined company … will benefit from enhanced scale, improved margins, higher free cash flow and the financial strength to accelerate the return of cash to shareholders through an industry-first fixed plus variable dividend strategy."

The 400,000 net acres in the Delaware Basin makes Devon the largest player in that unconventional region, which some analysts think puts the company in an advantageous position moving forward.

"The legacy [Devon] position is underpinned by some of the largest and most contiguous blocks of acreage in the core Red Hills area of Lea County [Texas], which is the most prolific part of the Delaware. The crown jewel of WPX's position is its [approximately] 50,000 net acre State Line position in Loving County [Texas], which is also one of the largest contiguous positions in the basin with material legacy infrastructure in place," U.S. Capital Advisors said as it initiated coverage on Devon on Jan. 13.

"Additionally, WPX brings [approximately] 60,000 net acres in Winkler/Ward Counties [in Texas] … that we think has significant upside with rightsized spacing," the analysts said.

In a recent overview of independent producers, Goldman Sachs gave Devon a "buy" rating in large part due to its acquisition of WPX.

"We believe that post the now-closed WPX acquisition, after focus on debt paydown the combined company is on track to deliver a [approximately] 5%+ fixed/variable dividend yield with low-to-mid single-digit oil growth and sub-1.0x leverage," the firm said.

Since the WPX merger was announced on Sept. 28, 2020, the value of Devon's stock has more than doubled. It closed at $9.80 per share on the NYSE that day and closed at $19.97 per share on Jan. 20 — a gain of more than 100% since the deal announcement. Like the Pioneer-Parsley merger, the Devon-WPX deal appears to have had some positive results in the short term.

"I'm a big fan of both deals, based on their complementary businesses with significant synergy potential and scale advantages," Meats said.