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WPX Energy's $2.5B acquisition of Felix Energy draws rare positive response

Shares of WPX Energy Inc. jumped Dec. 16 after the company announced an agreement to acquire Permian Basin operator Felix Energy LLC for $2.5 billion.

Possibly wary of the same investor backlash that has followed many recent merger announcements, WPX officials spent a good portion of a Dec. 16 conference call detailing how the move would benefit shareholders.

"Simply put, this is the only type of transaction we would even consider based on the high bar we've always had. We were only interested if it could deliver a quality deal at an attractive price that would appeal to a generalist investor," CEO and Chairman Richard Muncrief said. "The benefits for doing this are abundantly clear: immediate accretion per share, leverage neutrality, a larger and more durable free cash flow and the de-risked nature of this asset."

The addition of Felix's 58,500 net acre asset base would give WPX approximately 1,500 undeveloped drilling locations in the Permian's Delaware Basin, with an expected production of approximately 60,000 barrels of oil equivalent per day. Around 70% of the production total is expected to be oil, which was a point of appeal for WPX.

"Felix's average cumulative oil production is among the top in the entire basin," Muncrief said. "This acreage fits with our strong preference for the Northern Delaware and is located entirely in the state of Texas. All of these wells compete very well with our core state line acreage."

Adding the Felix acreage, Muncrief said, will accelerate WPX's five-year growth plan and allow for free cash flow of between $450 million and $550 million in 2022 at a West Texas Intermediate crude oil price of $50/bbl.

"The accretive structure of the deal with the stronger margins per boe are helping pro forma WPX achieve double-digit corporate-level returns much sooner than we expected versus a stand-alone WPX," Muncrief said.

The argument seemed to resonate with shareholders, as WPX's stock was up 7.6% to $11.74 per share in midmorning trading on the New York Stock Exchange on Dec. 16. It also received a largely positive review from analysts, who saw the combined company as performing at a higher level than if WPX had continued to stand alone.

"Assuming the current rig pace, the combination appears to drive a slightly improved oil mix and free cash flow profile, while keeping its financial leverage in check. Further, the transaction would place WPX on the cusp of large cap territory, expanding the investor base in the current environment," Siebert Williams Shank & Co. LLC managing director Gabriele Sorbara said.

Mizuho Analyst Paul Sankey agreed that the merger could vault WPX to another level in terms of production while satisfying the changing demands of investors.

"Our thinking on WPX has been high-quality company, assets, and management but at a challenging point in the development cycle (earlier stage in the Delaware Basin, higher initial declines) for the new oil environment (favoring higher immediate, free cash yield and cash return)," Sankey said. "WPX to its credit is framing the deal as accelerating the free cash flow yield & cash return outlook."