Devon's $2.56bn Acquisition of WPX
Updated: Feb 11
By: Gurneek Gill, Xinrui Wang, Nikola Radisic
Overview of the deal
Devon has agreed to acquire WPX in a merger of equals to form one of the largest independent US shales producers in an all stock deal valued at $2.56 billion. The new operator would be one of the largest unconventional energy producers in the US. This deal will really reinforce Devon’s basin-leading standing in the Permian via the unification of Devon and WPX’s complementary assets and operational proficiencies.
Company Details: Devon
Devon Energy Corporation is a pioneering independent oil and natural gas exploration and production company. Devon's operations are focused onshore in the United States. As of current, the company produces approximately 140,000 barrels of oil per day; about 575 million cubic feet of natural gas a day and about 80,000 barrels of natural gas liquids per day. Business strategies largely revolve around providing a consistently competitive shareholder return among their peer group.
Founded in 1971 , headquartered in Oklahoma, United States
CEO: David A. Hager
Number of employees: 1800 (2020)
Market Cap: $6.16 billion
LTM Revenue: $5.97 billion (FY2019)
Enterprise Value: $9.13 billion
LTM EBITDA: $1.38 billion
LTM EV/Revenue: 1.52
LTM EV/EBITDA: 6.63
Company Details: WPX Energy
WPX Energy, Inc. is an oil and natural gas exploration and production company. It is engrossed on manipulating, developing and growing its emerging oil positions in the Delaware Basin (a Permian Basin subset) in Texas and New Mexico and the Williston Basin in North Dakota. As of late 2019, it operated 688 wells in the Delaware Basin, spanning over 122,000 acres here and the company owned interests in 787 wells operated by others.
Founded in 2011 , headquartered in Oklahoma, United States
CEO: J. Kevin Vann
Number of employees: 590 (2020)
Market Cap: $4.64 billion
LTM Revenue: $2.44 billion (FY2019)
Enterprise Value: $7.67 billion
LTM EBITDA: $1.16 billion
LTM EV/Revenue: 3.14
LTM EV/EBITDA: 6.62
Following the collapse in oil prices since the beginning of the year, a wave of consolidation has swept across independent shale oil producers in the United States. The merger of equals between Devon and WPX is a further example of this trend as the industry looks to consolidate to survive in the current environment. Investors are more than happy for these deals to go through despite the low premiums paid, favouring larger companies over the long term.
Devon energy expects this deal to yield $575m synergies, in annual free cash flow improvements by 2021, something that will go a long way in helping a company currently ridden in debt where their levered free cash flow is -189% YoY. This will show healthy signs to investors and will give them more capital to continue maximising shale output from the Permian basin.
Moreover, Devon said that under the terms of the agreement announced on Monday, WPX investors will receive 0.5165 Devon shares for each WPX share they own. This news will be well received since Devon shareholders are going to reap immediate rewards from this deal. Specifically, the newly merged company will be “immediately accretive” in earnings, free cash flow, and invested capital. The new entity also plans to pay a “fixed plus variable” dividend. WPX investors will be glad to be a part of this and both companies saw a 12% share price increase in pre-market trading the day after the deal’s announcement.
The bigger picture looks promising for both companies and the energy sector to a certain extent. The new operator would be one of the largest unconventional energy producers in the US. This deal will really reinforce Devon’s basin-leading standing in the Permian via the unification of Devon and WPX’s complementary assets and operational proficiencies. This will hopefully deliver some sort of short-term consolidation in the shale industry as many had expected.
Beyond delivering $575 million in annual free cash flow improvements by end 2021 through merger synergies, the net present value of the various cost improvements in areas such as operational efficiencies, general and administrative savings and financing expenses over the next five years are worth $2 billion today. The new company will be more likely to keep its investment-grade rating, allowing for significant savings in financing.
The merger also allows the new company to soften the impact the upcoming Biden Administration will have on fracking. The president-elect has previously vowed to ban all new fracking on federal lands. Both companies combined have 60% of their output coming from the Delaware Basin. Much of it however is located on federal lands. Compared to Devon, WPX has a smaller percentage of its acreage located on federal lands, and the combined company will have 35% of its lease on those lands.
The new company has made a commitment towards fiscal discipline, announcing a new dividend scheme that comprises a quarterly payout of 11 cents a share and up to 50% of the remaining free cash flow. With a breakeven price of just $33 per barrel, this strategy towards prioritising free cash flow generation over production growth is certainly one that will please investors. Yet, given the volatile oil market, only time will tell if the new company is committed to its strategy if and when oil prices rise.
Risks and uncertainties
WPX has been accused by its shareholder of failing to disclose information relevant to the acquisition by Devon. It is questionable whether WPX adequately pursued alternatives to the acquisition and whether the board attained the best price possible for WPX shares of common stock. Several other companies expressed interest in WPX months prior to the all-stock shale-patch acquisition by Devon. One of them was ‘’Company C’’, which presented its proposal at a meeting with the WPX Chief Executive Officer Rick Muncrief on September 11th. ‘’Company C’’ offered a cash and stock payment, valuing WPX at $6.20 per share, when WPX closed at $4.33 on the same day. However, the WPX board and its advisers decided to go with Devon instead. The takeover premium was close to 2.6% when the acquisition was announced, much lower than the 43% premium ‘’Company C’’ offered.
As a direct consequence of COVID-19, earlier this year, oil demand plummeted and consequently prices turned negative for the first time in history. Even though the price managed to recover and is expected to go back to pre-pandemic value, the uncertainties of the pandemic suggest that it is not going to happen any time soon. At the Federal Reserve Energy Conference, Rick Muncrief forecasted that oil supply and demand will not come back into balance until the second half of 2021 due to the pandemic.