You knew it was coming, with energy underperforming, companies filing chapter 11, and the sector in the worst shape it has been in for almost 20 years, consolidation was inevitable. While there have been some smaller deals in the energy sector, the ConocoPhillips (NYSE: COP) massive purchase of Concho Resources Inc. (NYSE: CXO) in an all-stock transaction has many on Wall Street wondering who will be next.
The transaction is valued at $9.7 billion of equity value and an enterprise value of $13 billion. All Concho shareholders will receive 1.46 Conoco shares, representing a 15% premium to the closing price of the stock on October 13, 2020. On a pro forma basis, the ownership of the combined entity will be approximately 79% ConocoPhillips and 21% Concho Resources owners.
The analysts at Goldman Sachs noted that the companies are expecting to realize nearly $500 million of annual cost and capital savings by 2022. Conoco also identified unquantified value opportunities, including margin improvement from improved marketing/commercial performance with the larger Permian position, development strategy optimization from leveraging Concho’s expertise in the Permian basin, and supply chain benefits from increased scale/scope in the lower 48.
Goldman Sachs feels there could indeed be additional deals, noting this in the research report from which we gleaned the ConocoPhillips deal specifics:
While we continue to see greater consolidation over time among the highly-fragmented US shale sector, we note that some of the transactions within the past year (including the recently closed Chevron/Noble Energy deal and recently announced merger of equals between Devon and WPX have implied no-to-modest premiums to prior day close. As such, we believe investor focus on M&A opportunities may be weighted against the outlook for longer-term oil prices. Broadly, we believe free-cash-flow, synergies and valuation considerations will be important drivers of future M&A considerations.
The analysts have six companies that screen favorably with strong Permian Basin share assets and have a merger and acquisition rating of 1. One of those stocks was acquired in a $4.5 billion deal late Tuesday. We focused on the two that are rated Buy, and both are on the Conviction List at Goldman Sachs. it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This leading company remains a top pick across Wall Street and is a recent Conviction List member. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China. The company’s principal producing areas in the United States are located in New Mexico, North Dakota, Texas, Utah and Wyoming.
Goldman Sachs is very positive on energy for 2021 and noted this in its report:
Goldman Sachs Exploration & Production analyst Brian Singer sees 52% upside EOG over the next 12 months with EPS estimates significantly above consensus for the current quarter and over the next 4 quarters. He believes shares are oversold and do not reflect the company’s sustainability LEADership in Leverage, Earnings, Assets and Decarbonization. EOG shares have sold off on risk around post-election federal land access where EOG has greater interest than other Permian peers.