Big Deal in West Texas - Sept 21
Big Deal in West Texas - Sept 21
Shell to Exit Permian Basin in $9.5 Billion Sale to ConocoPhillips
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Big Deal in West Texas - Sept 21
Based on this deal: https://www.reuters.com/business/shell- ... 021-09-20/
our Sweet 16 companies in the Permian Basin are trading at a deep discount to their fair market value.
our Sweet 16 companies in the Permian Basin are trading at a deep discount to their fair market value.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Big Deal in West Texas - Sept 21
BofA Equity Research's take on the deal.
ConocoPhillips (COP) has reached an agreement with RD/Shell to purchase its 225,000
net acre position in a $9.5bn all cash deal. Speculation of a sale started in June and the
eventual sale value looks in-line with what had been speculated in the press (about
$10bn). However by our analysis the sales price is consistent with fair value at about
$50 WTI on a pre-tax basis so that at current strip prices RD/Shell has left substantial
value on the table, starting with COP’s suggestion that free cash yield on the acquisition
price is about 20% at current strip prices in 2022. Further, we suggest that at strip
prices, fair value is closer to $13bn on a pre-tax basis. We examined the potential sale in
our July 2021 report ‘Thoughts on Shell’s possible Permian sale’ at which time we
suggested COP as the most logical buyer. The confirmed sale immediately contributes to
COP’s prospective FcF yield of 15% in 2022, and is an opportune use of cash on its
balance sheet that further bolsters capital flexibility, provides options for additional
portfolio high grading and enhances free cash capacity to support dividend growth. Post
deal close expected by 4Q21, risks to our PO would be higher by about 5%.
COP was the logical buyer, compelling strategic logic
In our view, COP was the logical buyer of Shell’s Permian position, noting around
30% of acreage and about 50% of some 200,000 boepd of oil and gas production is
operated. As reviewed in our July report, we see COP’s strategy of low growth, high cash
returns aligned with its non-op partner Occidental; however for its operated portion the
overlap with legacy Concho assets suggest further opportunities to optimize costs,
drilling programs etc. with long term growth aligned with the prior 10 year corporate
plan of about 3%. At the end of 2Q21, COP had $10.6 bn in cash and short term
securities, and robust leverage position of 17% net debt to book capital; at our current
estimates,free cash after dividends in 2H21 adds about $3.5bn. Consistent with this
outlook, COP expects to have $4bn in cash and equivalents at year /end. But it also
intends to step up asset sales ‘primarily from the Permian Basin’, high-grading what will
now be one of the largest positions in the Delaware with a planned disposal target
increased from $2bn to $4bn-5bn. Pro Forma, COP’s net acre position in the Permian
increases by 35% (54% in the Delaware) to 940,000; and production increases by 38% to
about 630,000 boe/d (2Q21 pro forma) rivaling Chevron, Occidental and ExxonMobil.
We expect a favorable response to a logical deal
Coincident with the acquisition, COP announced a 7% increase in its quarterly dividend
to 46c, lifting its current annualized yield to about 3.2%. However, capacity for additional
dividend increases, bolstered by share buy backs remains significant: per COP
management at $50 WTI (flat real at 2% inflation) it can return 100% of its market
capitalization over the next 10 years. This deal adds $1bn of incremental annual free
cash while enhancing COP’s already linear leverage to oil prices. Whether this changes
COP’s appetite for capital allocation to Alaska / exploration remains to be seen and will
be amongst questions for the conference call. But for now we expect a favorable
response from the market for an accretive deal, with obvious strategic logic and modest
incremental upside to fair value at strip prices. Our rating is Buy.
ConocoPhillips (COP) has reached an agreement with RD/Shell to purchase its 225,000
net acre position in a $9.5bn all cash deal. Speculation of a sale started in June and the
eventual sale value looks in-line with what had been speculated in the press (about
$10bn). However by our analysis the sales price is consistent with fair value at about
$50 WTI on a pre-tax basis so that at current strip prices RD/Shell has left substantial
value on the table, starting with COP’s suggestion that free cash yield on the acquisition
price is about 20% at current strip prices in 2022. Further, we suggest that at strip
prices, fair value is closer to $13bn on a pre-tax basis. We examined the potential sale in
our July 2021 report ‘Thoughts on Shell’s possible Permian sale’ at which time we
suggested COP as the most logical buyer. The confirmed sale immediately contributes to
COP’s prospective FcF yield of 15% in 2022, and is an opportune use of cash on its
balance sheet that further bolsters capital flexibility, provides options for additional
portfolio high grading and enhances free cash capacity to support dividend growth. Post
deal close expected by 4Q21, risks to our PO would be higher by about 5%.
COP was the logical buyer, compelling strategic logic
In our view, COP was the logical buyer of Shell’s Permian position, noting around
30% of acreage and about 50% of some 200,000 boepd of oil and gas production is
operated. As reviewed in our July report, we see COP’s strategy of low growth, high cash
returns aligned with its non-op partner Occidental; however for its operated portion the
overlap with legacy Concho assets suggest further opportunities to optimize costs,
drilling programs etc. with long term growth aligned with the prior 10 year corporate
plan of about 3%. At the end of 2Q21, COP had $10.6 bn in cash and short term
securities, and robust leverage position of 17% net debt to book capital; at our current
estimates,free cash after dividends in 2H21 adds about $3.5bn. Consistent with this
outlook, COP expects to have $4bn in cash and equivalents at year /end. But it also
intends to step up asset sales ‘primarily from the Permian Basin’, high-grading what will
now be one of the largest positions in the Delaware with a planned disposal target
increased from $2bn to $4bn-5bn. Pro Forma, COP’s net acre position in the Permian
increases by 35% (54% in the Delaware) to 940,000; and production increases by 38% to
about 630,000 boe/d (2Q21 pro forma) rivaling Chevron, Occidental and ExxonMobil.
We expect a favorable response to a logical deal
Coincident with the acquisition, COP announced a 7% increase in its quarterly dividend
to 46c, lifting its current annualized yield to about 3.2%. However, capacity for additional
dividend increases, bolstered by share buy backs remains significant: per COP
management at $50 WTI (flat real at 2% inflation) it can return 100% of its market
capitalization over the next 10 years. This deal adds $1bn of incremental annual free
cash while enhancing COP’s already linear leverage to oil prices. Whether this changes
COP’s appetite for capital allocation to Alaska / exploration remains to be seen and will
be amongst questions for the conference call. But for now we expect a favorable
response from the market for an accretive deal, with obvious strategic logic and modest
incremental upside to fair value at strip prices. Our rating is Buy.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Big Deal in West Texas - Sept 21
COP paid approximately $18,000 per acre and $30,000 per flowing boepd and the Wall Street Gang thinks COP got a good deal.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group