U.S. oil and gas producer Devon Energy Corp. said it will buy Permian basin peer WPX Energy Inc. for $2.56 billion as it looks to boost its presence in the Delaware portion of the prolific shale field, Reuters reported.
The deal comes as U.S. shale companies post losses due to weak crude prices and struggle to raise new capital to restructure debt.
But as producers seek out combinations to survive a coronavirus-induced slump in demand, deals at little or no premium are becoming the norm.
The deal values WPX at $4.56 per share, just 2.7 percent higher than the stock’s closing price on Friday. WPX shares rose as much as 11.5 percent in early trading to $4.95, while Devon was up 4.7 percent at $9.23.
“Sector consolidation remains a critical focus, though we think news of a DVN/WPX combination is somewhat unexpected and could be complicated by likely shareholder votes on both sides given relatively similar market caps,” Cowen analysts said.
Devon's deal is the second big merger after a price shock in April. In July, Chevron Corp. agreed to buy Noble Energy Inc. for $5 billion.
Devon said the deal, expected to close in early 2021, will help cut costs and increase annual cash flow by $575 million by the end of next year.
The combined company, in which Devon will own 57% stake, will hold 400,000 net acres in the Delaware and can produce 277,000 barrels of oil per day.
It will pay dividends using a “fixed plus variable” strategy, issuing a set 11 cents per share per quarter along with up to 50% of the remaining free cash flow.
Such a payout plan is seen as a new model for the industry that has fallen out of favor with investors after years of poor returns.
As part of the deal, WPX shareholders will get 0.5165 shares of Devon common stock for each share of WPX common stock owned.
Reporting by Shruti Sonal in Bengaluru; Editing by Saumyadeb Chakrabarty and Arun Koyyur
