Even as the global price for fuel continues to be very low, the process of consolidation in the energy sector continued with ConocoPhillips agreeing on Monday to acquire the United States based shale oil producer Concho Resources in a deal worth for $9.7 billion.
The weak crude prices have hit many US shale companies very hard and many are in depe losses. And unlike in previous downturns, the shale oil producers have found it very difficult to raise new capital to take care of the heavy debts that they have encountered.
This latest deal in the sector will comprise of low-premium and all-stock.
With the conclusion of the deal, ConocoPhillips will be propelled to become one of the largest producers in the Permian Basin, the prime US oilfield whose area comprises of West Texas to South Eastern New Mexico. The acquisition would also make ConocoPhillips the largest US independent company with an output capacity of 1.5 million barrels per day (bpd).
Currently, the oil wells of Concho that are spread across more than half a million acres helps the company to produce about 319,000 bpd which makes it the fifth largest producer by volume in the Permian.
While Conoco is the major producer of oil in two other US shale fields, it only pumps about 50,000 bpd in the Permian.
“Concho has been on the short list of big Permian companies attracting interest due to its large production, vast acreage and relatively low debt,” said Andrew Dittmar, M&A analyst at consultancy Enverus.
He said that the company has very little operations on federal lands which is a positive for the company because of the proposal given by the Democratic party presidential candidate Joe Biden to ban new permits for fracking on government property.
After many shale producers borrowed in a bet on higher prices, the sector has been consolidating. In more recent times, global oil prices have crashed which has resulted in shale investors being left with little to show for the rising output and companies have been struggling to pay down their debts.
The deal values Concho at $49.30 per share, 1.4% above Friday’s close, and continues a trend of all-stock, low premium combinations, including the WPX Energy-Devon merger and Chevron’s purchase of Noble Energy.
ConocoPhillips said the premium was 15% based on Concho’s price on Oct. 13, before news reports on the deal talks surfaced.
Concho had not posted an annual profit since 2018 and as of the end of June, the company had long term debt of $3.9 billion. The company reported a loss of $435 million in the second quarter which was more than the $97 million loss that the company had reported for the same period a year ago.
Conoco said that after the completion of the deal, the new entity will have a combined holding capacity of about 23 billion barrels of oil equivalent resources and the average cost of supply for it will be below $30 per barrel of US West Texas Intermediate crude.
(Adapted from DeccanHerald.com)