Devon Energy Absorbs WPX In Oil Industry ‘Merger Of Equals’

In what’s being billed as a merger of equals, Devon Energy
DVN
will acquire WPX Energy in an all-stock deal that gives WPX shareholders five out of 12 board seats and .5165 Devon shares for each of theirs, amounting to 43% of “New Devon.” 

With a combined capital structure involving $6 billion in debt against $6 billion in equity, and daily production volumes of roughly 525,000 barrels per day of oil (and natural gas equivalents), the new Devon will be bigger than Apache Corp
APA
and Marathon Oil
MRO
, and just a notch below EOG Resources
EOG
. 

The deal, first rumored over the weekend, comes on the heels of Chevron’s
CVX
takeover of Noble Corp.
NE
, and features a popular new recipe for consolidating America’s beleaguered oilpatch — the stock-for-stock deal gives WPX just a 3% premium.

More consolidation has to happen, because without it companies will keep shrinking and disappear. With oil prices too low to incentivize new investment, companies have all but stopped drilling and fracking new wells. Devon cut Capex early in the down cycle, and has watched production volumes drop 40% since 2018. The flip side is that when you stop drilling suddenly cash begins to build up. Devon’s cash pile has grown to $1.5 billion.

Devon and WPX are a good match, with overlapping acreage holdings in key oil basins that will enable the companies to find upwards of $500 million in combination synergies, including layoffs. According to analysts at Tudor, Pickering & Holt, the new Devon will have enough low-cost oil prospects to target that it will be able to break even at an oil price as low as $33/bbl. The company is forecasting production growth of no more than 5% a year, while reinvesting no more than 80% of cash flow. 

The prize assets of WPX involve several hundred thousand acres in the Permian basin of west Texas and New Mexico. To build that Permian position WPX, led by CEO Rick Muncrief (formerly of Continental Resources
CLR
) acquired RKI Exploration for $2.75 billion in 2015, and then just nine months ago bought Felix Energy for $2.5 billion. The Permian position gives the new Devon plenty of options to drill as slowly as need be to survive the downcycle. The new company will also be strong in the Powder River Basin of Wyoming, with mature fields in the Eagle Ford and Bakken shales as well. 

The two companies are among the most attractively valued E&Ps; according to Credit Suisse
CS
data, WPX closed Friday at a valuation of 3.7 x enterprise value to 2020 ebitda, versus 3.9 x for Devon. Valued on a volume basis, WPX traded at $23,000 per flowing barrel of oil (or gas equivalents) per day, versus $16,000 per flowing boepd for Devon. Each company is on track for $1.5 billion in ebitda this year. 

Enshrining its dedicating to fiscal discipline, the new Devon announced a “fixed plus variable” dividend, featuring an 11 cent per share base plus variable payments promised for quarters in which the company has accumulated more than $500 million in cash and doesn’t need to use it to pay down debt. We’ll see if that discipline holds if and when oil prices get back above $50 some day. 

With this deal Devon, long a cross-town rival of both Harold Hamm’s Continental Resources as well as Chesapeake Energy
CHK
, emerges as the hands-down energy champion of Oklahoma City. Continental, which Muncrief left in 2014, now produces less than 300,000 boepd, with Hamm owning more than 80%. 

The company will consolidate WPX’s Tulsa headquarters into Oklahoma City at Devon Tower, at 844 feet the talled building in Oklahoma. Dave Hager, Devon’s CEO will be chairman of the new company, which will be run by Muncrief as CEO. Jeff Ritenour of Devon will be CFO, while WPX’s Clay Gaspar will be COO. 

There will be more such mergers to come. Analysts see Marathon Oil, ConocoPhillips
COP
and EOG as likely acquirers, while Cimarex, PDC and Parsley Energy are likely targets.