My Take on the XEC + COG merger - May 26

My Take on the XEC + COG merger - May 26

Postby dan_s » Wed May 26, 2021 1:17 pm

What I've done is combine my forecast/valuation models for XEC and COG. I am combining my forecasts for 2022 and using it as the basis for my valuation.

Assumptions.
> XEC shareholders get 4.0146 shares of COG for each share of XEC.
> Even though XEC shareholders end up with a higher percentage of the stock, it is XEC that goes away. The combined company will get a new name.
> When the merger closes there will be approximately 815.3 million shares of COG outstanding.
> Post-Merger "Newco" estimated production in 2022 should be approximately 675,000 BOE per day.
> Post-Merger production mix s/b approximately 74% natural gas, 12% NGLs and 14% crude oil. So, "Newco" is a "gasser".
> Commodity prices assumed for 2022 (net of hedges and regional differentials) that I've used in the model are $2.70/mcf of ngas, $21/bbl NGLs & $60/bbl oil.< Note that these are BELOW THE CURRENT PRICES.

My 2022 Proforma Forecast
> Revenues of $5,652 million
> Operating expenses of $2,880 million, without considering any synergies which the companies estimate at $100 million per year.
> Net Income of $2,057 million, $2.52 per share
> Operating cash flow of $3,653 million, $4.48 per share
> Assuming a capital expenditure program of $1.1 Billion in 2022 (same as their capex budgets for 2021), free cash flow will be $2,553 million.

A company the size of "Newco" with a VERY STRONG balance sheet and lots of running room should deserve a valuation of 6X to 8X operating cash flow, so my initial price target is 6 X $4.48, rounded to $27/share.

$27 X 4.0146 = ~$108, which compares to my current valuation of XEC of $114. < To put it another way, I think XEC has 62% upside from where it is trading today.

I have posted the "Proforma XEC + COG model to the EPG website. Check it out and let me know if you see any holes in my logic.

NOTE: Newco will be heavily weighted to natural gas and I believe there is significant upside to the gas price that I am using in the model ($2.70/mcf).
Last edited by dan_s on Wed May 26, 2021 6:30 pm, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
dan_s
 
Posts: 25565
Joined: Fri Apr 23, 2010 8:22 am

Re: My Take on the XEC + COG merger - May 26

Postby dan_s » Wed May 26, 2021 1:51 pm

Gabriele Sorbara at Siebert Williams Shank & Co is the only analyst that has provided a valuation of COG / Newco.
On 05/24/21 he rated COG a BUY with a price target of $25.00, which equates to a $100 price target for XEC.
Dan Steffens
Energy Prospectus Group
dan_s
 
Posts: 25565
Joined: Fri Apr 23, 2010 8:22 am


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