A new deal between Devon Energy and WPX Energy will create one of America’s largest independent shale producers. The deal is worth $2.56 billion, and was spurred on by investor interest in consolidation in the Permian Basin’s shale oil industry. Rachel Adams-Heard and David Wethe report for Bloomberg, writing:
The transaction, which includes a deal premium of about 2.6%, will see Devon shareholders own approximately 57 percent of the combined entity, the companies said Monday in a statement. Shares of Devon and WPX rose, indicating investor enthusiasm for the deal.
The plunge in oil prices this year, which has left much of the shale industry unprofitable, has added to the impetus for mergers and acquisitions, particularly in the Permian, where scores of producers operate in close physical proximity.
U.S. shale investors are frustrated after years of poor returns and missed targets. Many have called for the sector to consolidate in order to slash costs, and some have advocated for low- to no-premium deals to get those deals across the finish line. Stock prices have been hammered, and companies with market values of less than $5 billion are losing relevance with public investors, according to analysts at Tudor, Pickering, Holt & Co.
“The bar for investment is rising daily — with most long-only clients we speak with now leaning towards a $10 billion minimum market cap for investment,” the analysts wrote in a note Monday. “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 combination of Devon and WPX will tie together two companies with sizable operations in the hottest part of the prolific Permian Basin, which straddles West Texas and southeastern New Mexico.
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