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    Concho Resources in $9.5bn Permian Deal


Will share + debt deal launch a new wave of 'Permania' in the M&A space?

by: Dale Lunan

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Concho Resources in $9.5bn Permian Deal

Concho Resources, an independent oil and gas producer focused on the Permian Basin in Texas, announced March 28 a $9.5bn stock and debt deal that will see it acquire RSP Permian, an independent producer with a large, contiguous holding in the core Midland and Delaware basins.

Under terms of the merger agreement, RSP shareholders will receive 0.32 Concho shares for each RSP share, which for the purposes of this transaction are valued at $50.24 each, a 29% premium to the March 27 closing price of $38.92. The acquisition is expected to close in 3Q 2018, subject to the usual shareholder approvals and other closing conditions.

The acquisition expands Concho’s Permian holdings to some 642,000 net acres, adds 56,000 barrels of oil equivalent/day (boe/day, 80% oil and 20% gas) to Concho’s 211,000 boe/day production portfolio and creates the largest producer of unconventional oil and gas in the Permian Basin with a net resource base estimated at 12.2bn boe. Concho also takes on RSP's $1.5bn of net debt.

“This transaction provides a compelling opportunity for both Concho and RSP shareholders to benefit from the strength of our combined company,” Concho CEO Tim Leach said. “The RSP team built an exceptional high-margin asset portfolio consistent with our playbook – large, contiguous positions in the core of the Permian Basin. And they did so with a strategy of maximizing well performance and returns, which provides substantial running room for continuous development with large-scale projects.”

The acquisition, however, has already drawn the attention of shareholder rights law firm Johnson & Fistel, which has launched an investigation into whether RSP's board members breached their fiduciary duties in connection with the proposed sale. The investigation concerns whether RSP's board failed to satisfy their duties to RSP's shareholders, including whether the board adequately pursued alternatives to the acquisition and whether it obtained the best price possible for the shares.

“Johnson Fistel is investigating whether the proposed deal represents adequate consideration, especially given that one Wall Street analyst has a $69 price target on the stock,” the firm said in a statement.

In a news release, Concho said the acquisition “drives significant operational synergies” because of shared infrastructure and capital efficiencies, which could translate into a present value of $2.2bn.

But Andy McConn, a research analyst at Wood Mackenzie, said realizing that level of efficiency will be challenging for a number of reasons.

“RSP was already a lean business,” he said in an email to NGW. “Its Delaware position is not contiguous with Concho's. Concho's operational prowess – its high-ranking well performance  could add value to RSP's position. But RSP already operated its position with comparable skill.”

And the headline deal metrics – the 29% premium and $75,000/acre purchase price – are “rich and suggest no pull-back in valuations from previous deals for top-tier Permian assets.”

The deal, McConn said, also underscores an argument that is gaining steam on the street: performance “sweet spots” in the Permian aren’t quite as big as everyone originally thought.

“With more than half a million acres, Concho already held a large Permian position with plenty of drilling inventory,” he said. “Buying RSP, which held a smaller but concentrated position in recognized sweet spots, suggests that Concho recognizes the importance of focusing activity in areas of the highest quality.”

According to data released by Concho, the acquisition adds 5,000 gross drilling locations to Concho's existing inventory of 21,000 drilling locations.

The RSP acquisition is the latest step in the consolidation of the Permian Basin that saw more than $40bn spent on upstream M&A there between 2Q 2016 and 1Q 2017. Most of those deals, however, consisted mainly of assets or private companies, rather than publicly-held corporations.

“Looking ahead, any other large-scale deals will face significant headwinds - rich valuations, anxious investors, and scrutiny on operational performance,” McConn said. “If this deal is to mark a second wave of ‘Permania’ in the oil M&A market, potential acquirers will have to be firmly confident in the Permian’s long-term potential.”