Does DVN/MRO Merger Make Sense?
Posted: Tue Oct 24, 2023 10:01 am
Analysis from ScotiaBank on 10/24/2023
Does DVN/MRO Merger Make Sense?
OUR TAKE: Positive. Last week (10/18), several medias reported that Devon Energy (DVN) is actively exploring a potential merger with Marathon Oil (MRO). In light of the back to back merger announcements from XOM/PXD and CVX/HES over the past two weeks, we believe the industry’s consolidation trend will likely accelerate; please refer to our report on Another Deal, the Bigger Gets Stronger, dated 10/23/23.
In our opinion, the industry’s future consolidation will be primarily driven by 3 reasons – (1) improving the buyer’s portfolio quality or inventory backlog such as the case of XOM/PXD and CVX/HES transactions; and/or (2) improving the economies of scale and cost reduction; and/or (3) expanding their natural shareholder base.
KEY POINTS
Will a combination of DVN and MRO improve the proforma company’s portfolio quality or address investors’ concern about their inventory backlog?
Our short answer to the first part of the question is a compelling yes and the second part of the question is an indirect benefit. The two companies’ acreages across 4 of their common basins are highly complementary due to the proximity of their land positions, which should lead to substantial operational synergy benefit including possible longer lateral length. In addition, the much expanded land position should bring more land swap and trade opportunities which over time should lead to high-grade of non-Tier or lower tier assets to better returns. This indirectly and partially addresses some investors’ inventory backlog concerns.
How will DVN-MRO change the proforma company’s competitive position?
We think the DVN-MRO combination will not only improve the proforma company’s economies of scale but also improve the quality of the assets, completion design and overall drilling operation in the 4 shared basins through the best practice sharing, the proximity of their acreages, as well as land swap and trade.
Will the proforma DVN-MRO be more attractive to investors?
The combined entity will transform the two-second tier multi-basin large cap E&P companies into nearly a mega cap E&P with total global production exceeding 1 mmboe/d. This change has the potential to expand its investor base, making the company a more appealing option for a diverse range of investors.
Will a deal be accretive to DVN?
According to our analysis, assuming a 10% premium over MRO's Monday (10/23) closing price and a modest $300 million annual synergy assumption, the potential all-stock deal is expected to be accretive for DVN in terms of FCF yield and EBITDA per barrel, but appears to be dilutive in terms of P/E ratio. That said, we think the ultimate operating synergy could exceed our conservative estimate used in this report’s analysis.
If you'd like to see the PDF version with lots of maps and charts, send me an email: dmsteffens@comcast.net
Does DVN/MRO Merger Make Sense?
OUR TAKE: Positive. Last week (10/18), several medias reported that Devon Energy (DVN) is actively exploring a potential merger with Marathon Oil (MRO). In light of the back to back merger announcements from XOM/PXD and CVX/HES over the past two weeks, we believe the industry’s consolidation trend will likely accelerate; please refer to our report on Another Deal, the Bigger Gets Stronger, dated 10/23/23.
In our opinion, the industry’s future consolidation will be primarily driven by 3 reasons – (1) improving the buyer’s portfolio quality or inventory backlog such as the case of XOM/PXD and CVX/HES transactions; and/or (2) improving the economies of scale and cost reduction; and/or (3) expanding their natural shareholder base.
KEY POINTS
Will a combination of DVN and MRO improve the proforma company’s portfolio quality or address investors’ concern about their inventory backlog?
Our short answer to the first part of the question is a compelling yes and the second part of the question is an indirect benefit. The two companies’ acreages across 4 of their common basins are highly complementary due to the proximity of their land positions, which should lead to substantial operational synergy benefit including possible longer lateral length. In addition, the much expanded land position should bring more land swap and trade opportunities which over time should lead to high-grade of non-Tier or lower tier assets to better returns. This indirectly and partially addresses some investors’ inventory backlog concerns.
How will DVN-MRO change the proforma company’s competitive position?
We think the DVN-MRO combination will not only improve the proforma company’s economies of scale but also improve the quality of the assets, completion design and overall drilling operation in the 4 shared basins through the best practice sharing, the proximity of their acreages, as well as land swap and trade.
Will the proforma DVN-MRO be more attractive to investors?
The combined entity will transform the two-second tier multi-basin large cap E&P companies into nearly a mega cap E&P with total global production exceeding 1 mmboe/d. This change has the potential to expand its investor base, making the company a more appealing option for a diverse range of investors.
Will a deal be accretive to DVN?
According to our analysis, assuming a 10% premium over MRO's Monday (10/23) closing price and a modest $300 million annual synergy assumption, the potential all-stock deal is expected to be accretive for DVN in terms of FCF yield and EBITDA per barrel, but appears to be dilutive in terms of P/E ratio. That said, we think the ultimate operating synergy could exceed our conservative estimate used in this report’s analysis.
If you'd like to see the PDF version with lots of maps and charts, send me an email: dmsteffens@comcast.net