Conoco to buy Concho for US$9.7b to create shale giant

[HOUSTON] ConocoPhillips agreed to buy Concho Resources for about US$9.7 billion in stock, the largest shale industry deal since the collapse in energy demand earlier this year and one that will create a heavyweight driller in America's most prolific oil field.

Investors will get 1.46 Conoco shares for each Concho share, the companies said Monday in a statement. The transaction represents a 15 per cent premium over Concho's closing price on Oct 13, the last trading session before Bloomberg News first reported the companies were in talks.

The pandemic-induced price crash and lackluster global economic recovery have accelerated the push for consolidation across the shale patch, which is under severe financial strain after years of debt-fueled growth. The combination Conoco and Concho will be one of the dominant operators in the Permian Basin of West Texas and New Mexico, rivaling only the likes of Occidental Petroleum and Chevron in terms of crude output.

It's Conoco's biggest deal under its current chief executive officer, Ryan Lance, who until now has sought to position the company almost as an anti-shale option for Wall Street, touting little-to-no-growth, steady cash flow and disciplined spending.

While Mr Lance has made no secret of his desire to take advantage of the downturn to expand in shale, he said in July that any transaction must meet Conoco's criteria of having a low cost of supply while being able to compete with the rest of the company's portfolio.

Houston-based Conoco emerged from the oil market slump in a relatively strong position with about US$7 billion of cash on hand. It recently resumed share buybacks. But its growth outlook is challenged: second-quarter production was down by almost 25 per cent from a year earlier after it joined many other US drillers in curbing output in response to lower prices.

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Adding Concho will dramatically alter its production profile. The Midland, Texas-based shale company is entirely focused on the Permian and pumped 319,000 barrels in the second quarter, about six times what Conoco produced there.

The combination will save US$500 million a year by 2022, and hand shareholders more than 30 per cent of cash from operations through dividends and other distributions, the companies said.

The Conoco-Concho deal may also signal further mergers and acquisitions in the sector. Despite a compelling rationale for more consolidation in order to cut costs, a lack of cash and Wall Street's antipathy toward the sector has made it hard to get deals across the line.

But with oil stable at around US$40 a barrel, there are signs that M&A may be picking up.

BLOOMBERG