Cabot Oil & Gas Corp and Cimarex Energy Co agreed to merge to form a U.S. oil and gas producer with an enterprise value of about $17 billion, the latest deal in a sector rebounding from one of its worst downturns, reported Reuters.
Cimarex shares tumbled 8% to $65.49, while Cabot's stock fell 7.3% to $16.51, with at least two analysts calling the deal a "surprise" as it brings together Cabot's gas-rich Marcellus shale positions in the U.S. northeast and Cimarex's oil-heavy acres in West Texas.
"We have long understood the long-term benefits of expanding geographically and beyond the Marcellus and adding more scale to our operations," Cabot Chief Executive Officer Dan Dinges said.
Meanwhile, Cimarex top boss Thomas Jorden said "high-quality diversified assets" will protect the company through the cycles.
Dinges will become the chairman of the combined company, while Jorden will be its chief executive officer.
Cimarex shareholders will get 4.0146 shares of Cabot stock for each share held, and will own 50.50% of the combined company. Cabot shareholders will hold the rest.
At an implied equity value of $7.4 billion, or $71.50 per Cimarex share, the deal reflects a less than 1% premium to the oil producer's Friday close.
Keybank analysts expressed concern that the deal turns Cimarex into a gas producer and takes away any benefits from rising oil prices. They also highlighted the meager premium.
The companies, however, appealed to shareholders with a promise of distributing half the free cash flow over time.
The combined company will pay an annual base dividend of 50 cents per share, plus an additional quarterly variable dividend. It also plans to pay a 50 cents per share special dividend after the deal closes, expected in the fourth quarter.
The combined company expects support to its free cash flow outlook of about $4.7 billion from 2022 to 2024 at $55 per barrel of U.S. oil prices and $2.75 per million British thermal unit (Btu).
Oil prices were trading at $64.50 per barrel on Monday morning, up about 33% this year, while gas prices have gained 13% to $2.85 per million Btu.
The companies expect to generate $100 million in annual savings, starting within 18 months to two years after the deal closes.
The deal comes on the heels of EQT Corp's plans to buy Appalachian basin rival Alta Resources earlier this month and Pioneer Natural Resources's agreement in April to buy privately held DoublePoint Energy for $6.4 billion.
