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Concho paying top dollar for top acreage in $9.5B Permian buy; shares plummet

Concho Resources Inc.'s announced $9.5 billion all-stock purchase of RSP Permian Inc. could make the company one of the major powers in the prolific Permian Basin oil play in West Texas, but investors reacted negatively as some analysts questioned an acreage cost as high as any in memory.

Concho shares were down 8.7%, to $143.32, around noon ET on March 28. They closed at $143.25. While shareholders may have been displeased with the price tag, Concho said adding RSP's acreage will make it the largest unconventional oil and gas producer in the Permian.

Analysts reviewing the deal credited Concho for finding quality acreage that is contiguous to its own in the Permian but said the buyout of another public company was costly. "We calculate that Concho paid ˜$50k-$60k/acre or one of the highest prices paid in any Permian deal based on total price [and] total acres," SunTrust Robinson Humphrey analyst Neal Dingmann said shortly after the deal was announced.

Jefferies LLC analyst Mark Lear gave a higher estimate, saying Concho placed a valuation on RSP of approximately $76,000 per acre, or a 29% premium. Other recent buyouts of similar size varied between $20,000 per acre and $44,000 per acre. "[Concho] likely paid a premium due to the size and contiguousness of [RSP]'s position," Lear said. The combined company would have about 640,000 net acres.

During a teleconference describing the call, Concho CEO Timothy Leach said the deal enhances the company's portfolio while providing scale and operational synergies but does not weaken the company's balance sheet. "Today's transaction checks all of those boxes," he said. "It's consistent with our disciplined strategy, pursuing the right acquisition to build for the future."

Sanford C. Bernstein & Co. LLC also said the cost was a stout one for Concho but countered that the positives may still be greater. Analyst Bob Brackett noted that the assets are "highly complimentary" in both of the Permian's major unconventional plays, the Delaware and Midland basins, and called RSP one of the top operators in the play.

"Investors should have little doubt about the quality of the assets and the operational team [Concho] is acquiring," he said.

RSP shares climbed 15.6% on March 28, closing at $45.