CXO merger into COP
Posted: Fri Oct 16, 2020 9:51 am
RBC Capital Markets: Feedback on a Potential Merger with CXO
Our impression from investor conversations for a potential merger between COP and Concho Resources (CXO) was favorable.
Consolidation was viewed as necessary and investors like the idea of two financially and operationally strong entitles coming together. Our prior note on what a combination looks like
conversation points were:
UPSIDE $52.00 for COP and TARGET of $50.00 to $52.00 for CXO
• What premium could COP pay and still be accretive as CXO is not in a position of weakness? Most investors were comfortable with a 20% premium, consistent with CXO up 10-15% today. We see 4% CFPS accretion at a 20% premium.
• Would COP use cash? We think it is unlikely that a significant cash component occurs, if a transaction were to occur. That said, it is possible for 10-15% because COP has a ~$800 million ownership in Cenovus Energy (CVE) that could be monetized.
• How does the upcoming election play into the decision? Both companies have some "election risk" but combined there is significantly more diversification and optionality.
• Why would COP be interested given its inventory depth? COP has 15 Billion boe of resource potential that is competitive below $40/bbl (WTI). However, adding scale to COP's 167k unconventional Permian acreage position improves scale and efficiency and is an alternative runway if investment in Alaska is challenged due to the upcoming ballot initiative.
• What is CXO's FCF break-even point compared to COP? CXO's 2021 B/E point is sub $30/bbl aided by its strong hedge book. COP's B/E point is just below $35/bbl, very competitive considering unhedged.
• What does the FCF yield look like at $45/bbl (WTI)? We estimate a combined FCF yield of 7% with a line of sight near double digits.
Our impression from investor conversations for a potential merger between COP and Concho Resources (CXO) was favorable.
Consolidation was viewed as necessary and investors like the idea of two financially and operationally strong entitles coming together. Our prior note on what a combination looks like
conversation points were:
UPSIDE $52.00 for COP and TARGET of $50.00 to $52.00 for CXO
• What premium could COP pay and still be accretive as CXO is not in a position of weakness? Most investors were comfortable with a 20% premium, consistent with CXO up 10-15% today. We see 4% CFPS accretion at a 20% premium.
• Would COP use cash? We think it is unlikely that a significant cash component occurs, if a transaction were to occur. That said, it is possible for 10-15% because COP has a ~$800 million ownership in Cenovus Energy (CVE) that could be monetized.
• How does the upcoming election play into the decision? Both companies have some "election risk" but combined there is significantly more diversification and optionality.
• Why would COP be interested given its inventory depth? COP has 15 Billion boe of resource potential that is competitive below $40/bbl (WTI). However, adding scale to COP's 167k unconventional Permian acreage position improves scale and efficiency and is an alternative runway if investment in Alaska is challenged due to the upcoming ballot initiative.
• What is CXO's FCF break-even point compared to COP? CXO's 2021 B/E point is sub $30/bbl aided by its strong hedge book. COP's B/E point is just below $35/bbl, very competitive considering unhedged.
• What does the FCF yield look like at $45/bbl (WTI)? We estimate a combined FCF yield of 7% with a line of sight near double digits.