Billion-Dollar Shale Producers Announce Merger

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Devon Energy Corp. DVN 11.11% and WPX Energy Inc. WPX 16.44% have agreed to an all-stock merger that would create one of the biggest U.S. shale producers, the companies said Monday.

The combined entity’s estimated market value of about $6 billion would exceed the current value of all but seven other independent U.S. energy producers, according to data collected by RBC Capital Markets. The Wall Street Journal on Saturday reported that the companies were in talks to merge.

The deal could help the two companies ride out the oil-market slump coming after the coronavirus pandemic crippled global demand, leading American frackers to cut spending dramatically. U.S. benchmark oil prices are hovering around $40 a barrel, a level at which most shale producers can’t produce profitably—and bankruptcy looms over many weaker companies if the slump persists.

Devon Chief Executive Dave Hager said the move will accelerate plans to ditch the shale industry’s old strategy of pursuing rapid production growth at all costs and focus instead on generating income that exceeds drilling expense and returning excess cash to shareholders,
Mr. Hager will serve as the executive chairman of the combined company, which will be called Devon Energy, with Richard Muncrief, WPX’s chairman and chief executive, serving as its president and CEO.

“Investors have been vocal in advocating for responsible consolidation in our industry,” Mr. Hager said on a conference call.

Even before the pandemic, investors were generally avoiding the shale industry as most companies generated lackluster returns and spent more money than they made from drilling wells and pumping oil and gas. Collectively, 32 U.S. shale drillers outspent their cash flow in all but three quarters since the start of 2014, according to the consulting firm Rystad Energy.

Mr. Hager vowed the combined company would keep investment rates at 70% to 80% of operating cash flow and limit output growth to 5%, even in a more favorable oil-price environment. In addition to a fixed dividend, it also plans to implement a quarterly variable dividend that would distribute some of its available cash to shareholders.

Mr. Muncrief said the company would target 5% growth in oil production if prices were above $50 a barrel. “Longer term, if you’ve had a more constructive environment and you felt very confident that the higher prices were here to stay, then we could adjust accordingly,” he said.

Under the merger agreement, WPX shareholders receive 0.5165 shares of Devon for each share of WPX common stock owned. Devon shareholders would own about 57% of the combined entity, and WPX shareholders about 43%, the companies said. The enterprise value for the combined entity would be about $12 billion, they said.

Together, the companies would produce about 277,000 barrels of oil a day, with most of that coming from 400,000 net acres in the Delaware Basin, the western part of the nation’s largest oil-producing region in West Texas and New Mexico. They said the cost savings under way in the second half of the year and those resulting from the merger are expected to improve annual cash flow by $575 million by the end of 2021.

The deal is expected to close in the first quarter of 2021, the companies said. They said funds managed by EnCap Investments LP, which own about 27% of WPX shares outstanding, have supported the agreement.

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