New York — ConocoPhillips said Oct. 19 it would pay $9.7 billion for Concho Resources, cementing the largest US oil deal since the coronavirus pandemic took hold,increasing its Permian holdings and creating a top US independent E&P player.
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The deal gives Permian-operator Concho a greater geographic reach. Globally, the combined companies will have 23 billion barrels with an average cost of supply under $30/b and production of 1.502 million b/d of oil equivalent.
"The combination is remarkable. Just in regards to scale, ConocoPhillips is adding enough Permian production to nip at the heels of ExxonMobil's massive" program, said Robert Clarke, vice president, Lower 48 upstream, at Wood Mackenzie.
In the Permian, the combined entity have over 700,000 net acres spanning the Delaware and Midland Basins, with Concho contributing 550,000 net acres.
Concho produced 319,000 boe/d from the Permian in the second quarter, 65% of it oil. ConocoPhillips' Q2 production totaled 981,000 boe/d, after output curtailments of 225,000 boe/d related to the coronavirus pandemic.
Concho is an experienced Permian operator, having specific knowledge of the Permian Basin while ConocoPhillips is more active in other unconventional shale plans.
"ConocoPhillips has proven itself as a leader in shale technology. This can be seen in how its Bakken and Eagle Ford projects have progressed down the cost curve as well as how successfully it manages later-life shale declines," said Wood McKenzie's Clarke.
The all-stock deal gives each Concho shareholder 1.46 shares of ConocoPhillips stock - 15% premium to Concho's Oct. 13 closing price and, means that ConocoPhillips shareholders will have a 79% stake in the new company while Concho shareholders will own 21% of the company with an enterprise value of $60 billion.
The deal is expected to close in the first quarter of 2021, subject to regulatory approvals.
Stressing the deal was not made to plug portfolio gaps in either company, ConocoPhillips CEO Ryan Lance said the combination arose from likeminded thinking shared by Concho CEO Tim Leach as to where the industry was headed and the best way to position the companies for that shift.
"Tim and I both agree that sector consolidation is both necessary and inevitable," Lance said on the call to discuss the transaction.
Analysts speculating last week on the rumored buyout of independent upstream producer Concho suggested the deal would allow the acquirer to bulk up in the Permian Basin and potentially "fill a gap" in operations if its Alaska operation is affected by that state's ballot initiative to raise oil and gas taxes.
ConocoPhillips CEO Lance dispelled that notion.
"Both companies have stated we have enough assets on non-federal acreage to support development for a decade and beyond," said Lance, adding both companies have had "similar plans in place to mitigate against that risk.
"This doesn't change our view of projects like [Alaska's] Willow or NFE [North Field Expansion] in Qatar," he said, adding these big long-term projects are important to help balance the company's portfolio.
ACCELERATED COMMITMENT TO ESG
Another point of agreement between the two companies is the importance of ESG going forward, which led to the adoption of the Paris-Aligned Climate Risk Framework by the soon-to-be joint entity, which should be taken as a "clear indication of our continued commitment," Lance said.
"We are the first US-based oil and gas company to take this step," he said.
The Paris-Aligned Climate Risk Framework is aimed at funding a "low-carbon and climate resilient economy" and has several key benchmarks used to measure progress.
The companies are targeting operational emissions intensity reduction by 35%-45% by 2030 with the goal of net-zero by 2050.
"But the final part of emissions reduction is something that is right. It's aspirational but it's not aspirational with our fingers crossed. We've got a lot of work going on to identify ways and pilot test operations," said Lance.
By the end of this year, ConocoPhillips will have in place a "significant portion of Lower 48 processing sites with permanent monitoring in place by year end," Lance said, which means that about 2/3 of all US production monitored for methane emissions.
"We think we're probably the first company to actually deploy this on such a large scale," he said.
Lance cited Concho's "low scope emissions [in their Permian drilling operations] and their leadership in water stewardship in the Permian" as an excellent complement to ConocoPhillips' activities.
"Tim and I agree that ESG performances are imperative," Lance added.
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