(Bloomberg) -- ConocoPhillips is in talks to acquire rival Concho Resources Inc., according to people familiar with the matter, as one of America’s largest independent oil explorers looks to make a bold bet on shale during an historic industry downturn.
The companies may announce a deal in the next few weeks, said the people, who asked to not be identified because the matter isn’t public. Concho shares climbed as much as 15% in New York trading Wednesday, the most since April. They were up 13% at $49.73 each at 9:50 a.m., giving the Midland, Texas-based company a market value of about $9.8 billion.
Conoco shares climbed 1% to $35.25, translating into a market value of almost $38 billion. No final decision has been made and talks could fall through, the people said. Representatives for Conoco and Concho didn’t immediately respond to requests for comment.
The potential combination would be the latest sign that long-expected consolidation in the shale patch has finally arrived. A purchase of Concho, which has an enterprise value of $13.4 billion, could become the year’s largest takeover of an oil and gas company, according to data compiled by Bloomberg. It would likely surpass Chevron Corp.’s all-stock acquisition of Noble Energy Inc., which was valued at about $11.8 billion including debt when it closed in October.
It would follow Occidental Petroleum Corp.’s $38 billion purchase of Anadarko Petroleum Corp. last year and could come just weeks after a $2.6 billion merger of Devon Energy Corp. and WPX Energy Inc. A transaction would also continue a trend of explorers seeking to bulk up specifically in the oil-rich Permian Basin of West Texas and New Mexico, the most productive field in the U.S.
‘Across the Board’
Conoco has been dropping hints about a potential M&A deal for months. In July, Chief Executive Officer Ryan Lance said the company was encouraged by the low premiums needed for acquisitions in the shale sector, citing Chevron’s deal to buy Noble.
“We’re looking at asset deals, we’re looking at corporate deals, we look across the board,” he said at the time.
Concho has drilling rights on about 800,000 gross acres in the Permian, according to a September investor presentation. While Houston-based Conoco has lost nearly half its market value this year, it’s held up relatively well compared to peers as oil prices collapsed during the coronavirus pandemic.
A deal between the two companies would make “strategic and financial sense,” JPMorgan Chase & Co. analysts led by Phil Gresh wrote in a note Wednesday, adding that acquiring Concho would be accretive on most metrics and provide “critical mass” to Conoco’s position in the Permian.
Concho’s 2.4% bonds due 2031 rose as much as 5.8 cents on the dollar to 102.1 cents, the biggest intraday increase on record, according to Trace data compiled by Bloomberg.
Last month, Conoco said that it would resume share repurchases, after cutting production and curbing spending to conserve cash in the first half of 2020.
Concho and Conoco together produced about 1.3 million barrels of oil equivalent a day in the second quarter, according to data compiled by Bloomberg Intelligence, just shy of the output of crude giant Occidental.
Concho Resources (CXO) Update - October 14
Concho Resources (CXO) Update - October 14
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Concho Resources (CXO) Update - October 14
Comments below are from Stifel:
Bloomberg published an unsubstantiated report claiming ConocoPhillips is in talks to acquire Concho Resources in the next few weeks. While we have no knowledge of potential M&A talks between ConocoPhillips (COP) and Concho Resources (CXO), we believe there is merit to the combination for several reasons.
First, COP has been quite vocal about its desire to pursue M&A and CXO's position would address COP's reinvestment risk overhang.
Second, the transaction would further dilute CXO's federal risk exposure.
Third, we would view the transaction as a strength-on-strength merger with the pro forma company resulting in a best-of-breed diversified Bellwether.
Fourth, the transaction is one of the few that makes sense from a charts perspective.
Lastly, we believe there is a degree of admiration between the companies based on our past discussions with management.
Net-net, we would expect a DVN-WPX type response to a potential announcement assuming an all-stock transaction.
Key catalysts: We are primarily focused on three catalysts.
First and foremost, improvement in the commodity outlook. We expect the combination of the OPEC+ agreement and reduced activity from U.S. onshore and other non-OPEC nations will result in an improved macro backdrop for 2021 and 2022, with higher oil and gas prices needed to address our projected undersupplied market in 2022.
Second, we believe election risk is weighing on the stock, and Concho offers value if a potential Biden presidency takes a more conservative approach to land access for oil and gas development than is being messaged during the campaign. < My 2 cents worth. Biden will not ban fracking because would send gasoline and consumer utility bills through the roof. Consumers = Voters and the Democrats would get killed in the mid-terms, giving back all of the power grab back to the Republicans.
Third, we expect management to focus on further improving operating margins by reducing its controllable costs below $8.50/boe on average for 2020 despite lower anticipated volumes. During Q220, management also reduced DC&E guidance for the second time this year to $800/ft. (30% lower versus 2019).
Valuation: We reiterate our Buy rating and 12-month target price of $83.00/share.
Bloomberg published an unsubstantiated report claiming ConocoPhillips is in talks to acquire Concho Resources in the next few weeks. While we have no knowledge of potential M&A talks between ConocoPhillips (COP) and Concho Resources (CXO), we believe there is merit to the combination for several reasons.
First, COP has been quite vocal about its desire to pursue M&A and CXO's position would address COP's reinvestment risk overhang.
Second, the transaction would further dilute CXO's federal risk exposure.
Third, we would view the transaction as a strength-on-strength merger with the pro forma company resulting in a best-of-breed diversified Bellwether.
Fourth, the transaction is one of the few that makes sense from a charts perspective.
Lastly, we believe there is a degree of admiration between the companies based on our past discussions with management.
Net-net, we would expect a DVN-WPX type response to a potential announcement assuming an all-stock transaction.
Key catalysts: We are primarily focused on three catalysts.
First and foremost, improvement in the commodity outlook. We expect the combination of the OPEC+ agreement and reduced activity from U.S. onshore and other non-OPEC nations will result in an improved macro backdrop for 2021 and 2022, with higher oil and gas prices needed to address our projected undersupplied market in 2022.
Second, we believe election risk is weighing on the stock, and Concho offers value if a potential Biden presidency takes a more conservative approach to land access for oil and gas development than is being messaged during the campaign. < My 2 cents worth. Biden will not ban fracking because would send gasoline and consumer utility bills through the roof. Consumers = Voters and the Democrats would get killed in the mid-terms, giving back all of the power grab back to the Republicans.
Third, we expect management to focus on further improving operating margins by reducing its controllable costs below $8.50/boe on average for 2020 despite lower anticipated volumes. During Q220, management also reduced DC&E guidance for the second time this year to $800/ft. (30% lower versus 2019).
Valuation: We reiterate our Buy rating and 12-month target price of $83.00/share.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group