Shares in ConocoPhillips are advancing 2.7% in Monday’s pre-market session after the oil producer announced the $9.7 billion acquisition of shale producer Concho Resources in an all-stock deal. Concho shares are up 3.6%.
Under the terms of the transaction, each share of Concho’s common stock will be exchanged for a fixed ratio of 1.46 shares of ConocoPhillips (COP) common stock, reflecting a 15% premium to closing share prices on Oct. 13. The merger of the two companies will create an entity with a $60 billion enterprise value and a combined resource base of approximately 23 billion barrels of oil. It will be the largest independent oil and gas company, with pro forma production of over 1.5 million barrels of oil equivalent per day (MMBOED).
As a result of the transaction, ConocoPhillips and Concho (CXO) expect to generate $500 million in annual cost and capital savings by 2022. The deal is expected to close in the first quarter of 2021.
“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,” said ConocoPhillips CEO Ryan Lance. “Together, ConocoPhillips and Concho will have unmatched scale and quality across the important value drivers in our business: an enviable low cost of supply asset base, a strong balance sheet, a disciplined capital allocation approach, ESG excellence and great people. Importantly, the transaction meets our long-stated and clear criteria for mergers and acquisitions because it is completely consistent with our financial and operational framework.”
In addition, the combined company will target an average reinvestment level of less than 70% of cash from operations to ensure sufficient free cash flow generation to fund returns of capital to shareholders. (See COP stock analysis on TipRanks)
Shares in COP have plunged more than 48% year-to-date, but the oil and natural gas giant nevertheless scores a Strong Buy consensus from the Street. That’s with 11 recent Buy ratings vs just 1 Hold rating. Meanwhile the average analyst price target of $48.27 indicates 43% upside potential lies ahead.
Commenting on the deal, Siebert Williams Shank & Co. analyst Gabriele Sorbara reiterated a Buy rating on CXO with a $70 price target, saying that he expects the combination of the two companies to continue to be positively received by the market.
“The transaction is logical for COP, as it vastly expands its presence in the Permian Basin with contiguous core acreage providing even greater running room,” Sorbara wrote in a note to investors. “At the deal terms, we estimate CXO is selling at the highest valuation in its peer group on our 2022 EV/EBITDA estimates.” (See CXO stock analysis on TipRanks)
The analyst noted that the transaction bodes well for other potential M&A targets, including Cimarex Energy, Parsley Energy and PXD.
Overall, Concho scores a Strong Buy analyst consensus with 11 Buys vs. 1 Hold. The $67.73 average price target implies 39% upside potential to current levels.
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