Devon Energy Corp. has agreed to acquire WPX Energy Inc. in a $2.56 billion all-stock deal, according to multiple sources.

In a press release, WPX Energy terms the deal “a merger of equals” and said it creates “a leading unconventional oil producer in the U.S.”
The merger will create one of the largest independent U.S. shale producers.

The transaction includes a deal premium of about 2.6%. Devon’s shareholders will control about 57% of the combined company.

Shares of both companies surged as a sing of investor approval of the energy deal. Experts say this merger also satisfied investors’ plea for consolidation in the sector during the coronavirus pandemic.

The acquisition includes WPX’s new $100 million headquarters in downtown Tulsa that’s still under construction. The company announced that it will finish construction and then sell the building. WPX will transfer some employees; however, some may lose their jobs. It’s unclear at this time how many of the company’s roughly 350 employees will also make the move.

“They are moving forward on the construction of that project, but who ultimately owns that building or the tenants, that’s going to have to be worked out with the details of the merger,” Mayor G.T. Bynum said in an interview with a local television station.

Shale Industry Unprofitable During the Pandemic

The drop in oil prices earlier in 2020 resulted in much of the shale industry being an unprofitable source of energy. It’s also added to thecatalyst for M&A, especially in the Permian basin, where numerous shale companies operate nearly one atop of another.

Several years of poor returns and missed targets have disappointed shale investors in the United States. Many investors urged the sector to consolidate to reduce costs, with some supporting low- to no-premium deals to achieve revenue expectations.

Energy stock prices have plummeted. Companies with market values of less than $5 billion are losing relevance with public investors, according one analyst. Observers say that the target for investment is continuing to climb. The majority of long-only clients investors talk to are looking at a $10 billion minimum market cap for investment.

“We believe the public markets would like to see the U.S. upstream sector drop down to 10-15 companies, most of which will likely consolidate through low premium stock-for-stock merger of equals,” the analyst remarked.

The New Devon Energy Company will have a Big Presence in Permian Basin

The combination of Devon and WPX will meld together two energy companies with considerable operations in the most productive section of the prolific Permian Basin, which is located in West Texas and southeastern New Mexico. Drilling in the US’s largest shale basin is down by more that 66%. This deal will produce 60% of its output in the Delaware sub-basin of the Permian. This sub-basin is where companies find some of the lowest breakeven costs in the country.

Their position in the Permian allows the new Devon a lot of options to drill slowly to survive the downcycle. The new energy company will also be strong in the Powder River Basin of Wyoming and in the mature fields in the Eagle Ford and Bakken.

The new entity plans to keep the Devon name and will be led by Rick Muncrief, Tulsa-based WPX’s current CEO.

Oklahoma City-based Devon also wants to begin a so-called fixed-plus variable dividend. This entails a quarterly payout of 11 cents a share and the distribution of up to 50% of the remaining free cash flow. The takeover is expected to close in Q1 of 21010.

“Bringing together our asset bases will drive immediate synergies and enable the combined company to accelerate free cash flow growth and return of capital to shareholders,” Devon CEO Dave Hager, who will become executive chairman, said in the statement.

Combined Capital Structure

The combined capital structure involves $6 billion in debt against $6 billion in equity. The daily production volumes will be roughly 525,000 barrels per day of oil (and natural gas equivalents). The new company will be bigger than Apache Corp and Marathon Oil, and just below EOG Resources.

Observers say that Devon and WPX are a good fit due to their overlapping acreage holdings in key oil basins that will enable the companies to enjoy at least $500 million in combination synergies, including layoffs. According one analyst, the new Devon will have enough low-cost oil prospects to target that it will be able to break even at an oil price as low as $33 a barrel.

The company is forecasting production growth of no more than 5% a year, while reinvesting no more than 80% of cash flow.

Other M&A Activity in the Energy Industry

The Devon-WPX merger follows the announcement that Chevron Corp. agreed to buy Noble Energy in July for approximately $5 billion. That merger didn’t concern solely Chevron acquiring more American shale assets, but also gave the company significant natural gas operations in the Eastern Mediterranean.

A Devon-WPX combination is the most significant transaction between two independent U.S. producers since WPX bought private equity-backed Felix Energy in March of this year.

Further, Cimarex Energy, PDC Energy, and Parsley Energy may be possible targets in the future, according to industry analysts. They think that ConocoPhillips, EOG Resources, and Marathon Oil are potential buyers.