#MergerMonday - Devon and WPX
It’s #mergermonday and even the decision of LinkedIn to permanently ban me from the platform for reasons unknown can’t sink my spirits. Devon and WPX are merging in a “merger of equals” where Dave Hager will be named executive chairman on the board and Rick Muncrief will be named President and CEO. More on that later.
When we first broke news of the rumored Felix acquisition, for a lot of reasons, I was a fan. More Delaware, more scale, and more cash flow. Before coronavirus changed the world, investors loved it and drove WPX’s stock from $10 to $14 in anticipation of the accretion that was to come. Encap was made a significant share holder, and the tables were set for WPX’s next move.
As the market collapsed, becoming a pure play Delaware player and divesting the Bakken simply wasn’t going to be in the cards, and clearly the board thought the best option was a merger. In July, we had a little fun with merger sweepstakes to guess the combinations over the next 12 months. At the time, and because of the Bakken connection, I thought CLR would be the winner but... Devon makes a lot of sense too. With their cleaner portfolio and balance sheet, and exceptional New Mexico assets, more Delaware gives Devon scale. That they now own Felix (through WPX) means that a big portion of their acquisitions since 2015 have been put together by the Felix team. I, for one, would add Skye to the board of directors ASAP. But that’s just me.
As always with press releases of this type... synergies about, scope and scale and depth and breadth and complimentary everything! But the key is $575mm in cost savings in 2021 and $2 billion over the next 5 years. For a company with a combined enterprise value of $12 billion, that is meaningful. But it also means a lot of headcount cuts and staffing reductions, which continues to move us in the direction of what I said earlier this year: 80% of US oil and gas jobs will disappear permanently - in large part because lower activity and mergers will substantially reduce the need for workers.
I like the deal. I like the WPX team for what they accomplished rebuilding and growing WPX and now, with more operating control of a larger footprint in the Delaware and with access to the rock Devon had there... there is a lot of upside. The market likes it to with both stocks up 12%.
But. Buyer beware. This is an NAV business that depends on price and oil, with Libya coming back on and lots of concerns about Q4 demand, isn’t looking to budge from $40. So until the day oil returns to levels to justify investment in drilling, cost cutting and kicking the can down the road with mergers of equals is the best way to control your destiny.
Look for many more, and for them to revolve around the Permian basin.