Independent oil producers Devon Energy Inc. (NYSE: DVN) and WPX Energy Inc. (NYSE: WPX) on Monday announced that they will combine in an all-stock merger of equals to create a firm with an enterprise value of approximately $12 billion. Upon closing, current Devon shareholders will own 57% of the combined company and WPX shareholders will own the rest.
WPX shareholders are to receive 0.5165 shares of Devon common stock for each WPX share they own. The total value is $2.56 billion, a premium of 2.6% to WPX’s closing price on Friday.
The two companies reported $7.1 billion in combined total debt at the end of the second quarter. Private equity firm EnCap Investments has agreed to vote its 27% stake in WPX in favor of the deal. The firm acquired that stake last December when WPX acquired Felix Energy for $2.5 billion. The transaction is expected to close in the first quarter of next year.
The deal has engendered new optimism for more consolidation in the oil patch, but the price is steep. Or, perhaps, cheap. The premium being paid to WPX shareholders is well below the premium of 7.6% that Chevron paid in its July acquisition of Noble Energy. Just last week, Goldman Sachs put a price target of $6.75 on WPX stock, a premium of 52% to Friday’s closing price.
The hope is that deals like this, now that the first one has occurred, will multiply as smaller independent producers combine to take advantage of cost savings and economies in capital spending.
According to Monday’s announcement, the combined company’s maintenance capital requirements to keep production flat in 2021 (more than 280,000 barrels a day estimated at the end of the fourth quarter) is projected at around $1.7 billion, which is based on expected savings and crude prices of $33 a barrel and natural gas prices of $2.75 per million BTUs.
So far in 2020, Devon has spent nearly $740 million on capex and WPX has spent about $620 million. The combined company expects to improve annual cash flow by $575 million in 2021.
The surviving company, which will retain the Devon name, will pay a quarterly fixed dividend of $0.11 per share plus a targeted payout of 10% of operating cash flow. In addition, Devon will pay up to 50% of “remaining free cash flow” quarterly in a variable distribution. The new dividend strategy becomes effective when the transaction closes.
WPX stock traded up about 12.4% in Monday’s premarket at $4.99 in a 52-week range of $1.94 to $14.43. The consensus price target on the stock was $9.10, and WPX does not pay a dividend.
Devon Energy stock was up about 9%, at $9.60 in a 52-week range of $4.70 to $26.98. The price target is $16.34. It currently pays an annual dividend of $0.44 (yielding 4.91%).