$9.5 Billion Deal Shakes Up Permian Basin

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Two mid-cap oil and gas production companies announced Wednesday morning that they have agreed to the biggest deal ever in the hydrocarbon-rich Permian Basin. Concho Resources Inc. (NYSE: CXO) has agreed to pay $9.5 billion in an all-stock deal for RSP Permian Inc. (NYSE: RSPP). The transaction price includes about $1.5 billion in RSP’s long-term debt.

RSP shareholders will receive 0.32 shares of Concho stock for each share of RSP stock they currently hold, a premium of 29% to the closing price of RSP stock on Tuesday evening. Once the deal is completed Concho shareholders will own about 74.5% of the combined company and existing RSP shareholders will own the rest. The companies expect to complete the transaction in the third quarter of this year, following shareholder and regulatory approval.

Concho is paying about $76,000 an acre for about 92,000 net acres. That’s a steep premium to the average of other recent Permian deals where the per-acre costs were around $40,000.

The combined company will hold leases on more than 640,000 net acres, and RSP’s 2017 fourth-quarter production levels adds some 44,400 barrels a day to Concho’s liquids production and about 11,100 barrels of oil equivalent in natural gas production. Concho’s net production at the end of last year totaled 70,320 barrels a day, of which about 62% was liquids.

The combined firm will claim the most active drilling program and the largest number of active rigs (27) in the Permian Basin. Within a few years, Concho is expected to overtake Occidental Petroleum as the Permian’s largest producer. Occidental’s production comes primarily from old wells.

According to a recent report from researcher firm Rystad Energy, Concho guided 2018 oil production from the Permian to increase by 10% year over year, and RSP had projected a production jump of 20% in its oil output.

Given the scale of the combined company’s potential drilling program, the companies estimate cost savings of more than $2 billion once the merger is completed.

S&P Ratings issued a note on the merger maintaining its BBB- rating with a Stable outlook on the stock.

Concho shareholders reacted predictably to a watering down of their shares, taking the shares down nearly 9% to trade around $143.12, in a 52-week range of $106.73 to $162.91.

Investors also treated RSP shares predictably, pushing the price up about 15.5% to $45.00, in a 52-week range of $28.76 to $47.17. The high was posted after this morning’s announcement.

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