Upstream M&A deals like Cimarex and Cabot take new twists and turns

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Upstream oil and gas mergers and acquisitions have transformed in recent years as the “Permania” has cooled and investors need acquisitions.

Much of the recent M&A deals have been peer-to-peer mergers in all-stock unions. But there have been surprises, such as this week’s announcement that Cabot Oil & Gas Corporation and Cimarex Energy will merge in an all-equity deal valued at $ 7.4 billion.

The combined entity will have a new name and be headquartered in Houston, with Cimarex holding a slight majority of the shares.

What surprised analysts was the combination of two companies with assets in different basins – Cimarex in the Delaware oil basin and Cabot in the dry-gas Marcellus basin.

“While the consolidation of public companies, including peer-to-peer mergers, has been a key theme in the post-COVID M&A market, this deal is a bit of a surprise and may have a less clear story to tell. investors, Andrew Dittmar, senior mergers and acquisitions analyst at Enverus, the Reporter-Telegram told the email. “Past mergers have generally involved consolidation in basins with easy readability towards economies of scale and efficient operations.”

In the case of Cabot and Cimarex, there are no synergies in the pool and overhead and administrative cost savings – targeting annual cost synergies of $ 100 million starting within 18 months to 2 years – have become thinner as E&Ps improved the efficiency of their operations, Dittmar continued. .

“Instead, this deal is driven by action on the financial side, primarily increasing the core dividend to be one of the most aggressive in the industry while adding a variable payout to the mix. The increased dividend, combined with the stability of operations as a larger company, is aimed at attracting long-term investors, ”he said.

He noted that the two companies bring something unique to the table as they strive to create an accretive deal. Cabot has low debt and high current cash flow, improving Cimarex’s pro-forma balance sheet and helping fund dividend plans. Cabot’s perceived weakness was his longer-term inventory trail. The addition of Cimarex’s position in the Delaware Basin addresses inventory issues while adding the ability to shift capital spending between gas and oil based on the relative performance of commodities, Dittmar said. Cimarex will significantly shift its mix of raw materials to gas – 79% pro-forma versus 42% currently – showing a bullish outlook for the product at this point, he added. Cimarex’s Anadarko position is said to play a minor role in the merged company.

Most public exploration and production companies have been more likely to retreat to single basin status, many with an eye on the Permian. Said Dittmar. One exception is Oasis Petroleum, which recently announced the sale of its Permian Basin portfolio for $ 481 million with plans to focus on its Williston Basin assets.

“It’s very interesting to see Oasis leaving the Permian to focus on the Williston Basin. Permian agreements with state-owned enterprises have almost always involved entry and expansion for years, with almost no retreats or refocuses on other areas, ”observed Dittmar. “Oasis is one of the first public companies to be willing to sell Permian and seize other opportunities. Repositioning to a pure non-Permian game is strategic for Oasis given their focus on the Bakken, combined with investor preferences for streamlined, low-cost operations. However, there are few other E&P that match this model. “

According to Dittmar, the buyer of the Oasis Permian Basin assets, Carnelian-backed Percussion Petroleum II led by John Campbell, also represents a reverse scenario of the usual Permian deal where private equity firms sell rather than buy. Private equity played a central role in the first rounds of the Delaware Basin showing just how productive drilling could be. Starting in 2016, PE firms capitalized on their success with numerous sales to public E&P firms, he said. “However, they only rarely bought back due to high surface prices instead of expanding into other parts of the Permian like the Central Basin Platform or the Northwest Plateau,” he said. he declares.

Oasis assets should be suitable for a private equity buyer, Dittmar continued. They were sold at a reasonable cost on a dollar per acre basis – less than $ 10,000 an acre – but present geological challenges that hamper dense development due to their location near the basin platform. central. The purchase of assets at the edge of a basin and the experimentation of drilling have in the past been a winning formula for private equity, he concluded.

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