RJ's Take on the XEC + COG merger - May 26

RJ's Take on the XEC + COG merger - May 26

Postby dan_s » Wed May 26, 2021 12:41 pm

Raymond James' initial reaction:

"Pro-forma versus standalone: All in all, we have the deal being accretive to Cabot's FCF yield which was ~9% (to EV) before the deal and is now
~12% pro-forma for the transaction. For Cimarex, the opposite is true with FCF yield falling from ~15% standalone to ~12% pro-forma for the
transaction. Both companies had stellar balance sheets before and after the transaction and are paying down large amounts of debt this year.
Standalone Cimarex (pre-deal) was trading at ~4x 2022E EBITDA and Cabot (pre-deal) was ~6x 2022E EBITDA, while the pro-forma company is ~5x
EBITDA. The deal also changes the commodity make-up of both companies. Cimarex, which will become only ~15% oil production next year versus
33% oil mix today so their exposure to our bullish oil outlook diminishes meaningfully. On the other hand, Cabot had provided investors with a
clean, straightforward way to play natural gas prices with 100% gas production and minimal hedges over the next two years . Although natural
gas still makes up roughly 75% of the pro forma company's RJe production in 2022, its share of revenue declines to a little over 50%."

What is interesting to me is that before the merger was announced Raymond James rated XEC a Strong Buy and COG as Market Outperform. How do two of their top rated stocks combine in an all-stock merger and the rating goes to a HOLD? I understand that from an operational standpoint a merger like this won't generate the synergy savings that a merger of two companies operating in the same are would generate, but size + really strong cash flow does matter in this business.
Dan Steffens
Energy Prospectus Group
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