In the wake of falling oil prices and an increase in inventory, oil and gas producer Concho Resources Inc. (CXO, Financial) announced on Wednesday it is buying RSP Permian Inc. (RSPP, Financial) in a deal valued at approximately $9.5 billion, creating the largest unconventional shale producer in the Permian Basin of West Texas.
The Midland, Texas-based company will buy its smaller rival, which is headquartered in Dallas, in an all-stock transaction. According to the terms of the deal, RSP shareholders will receive 0.32 Concho shares for every RSP share, which equates to roughly $50.24 per share, a 29% premium to its closing price on Tuesday. Upon closing, Concho shareholders will own approximately 74.5% of the combined company and RSP shareholders will own the remaining 25.5%.
In addition to operating the largest drilling program in the region, Tim Leach, Concho’s chairman and CEO, said the deal provides a “compelling opportunity” as it will meaningfully expand the company’s premium resource base, reinforce its leadership position and boost its three-year annualized production growth outlook.
“This combination allows us to consolidate premier assets that seamlessly fold into our drilling program, enhance our scale advantage and reinforce our leadership position in the Permian Basin, all while strengthening our platform for delivering predictable growth and returns,” he said.
The combined company expects to realize over $60 million in annual corporate-level savings and additional operational synergies. The deal is also expected to be immediately accretive to the company’s key per-share metrics.
In a statement, Steve Gray, RSP Permian’s CEO, expressed his excitement for the deal.
“As RSP has grown and we have seen the resource play develop in the Permian, we have come to recognize that combining with a company with the scale, investment grade balance sheet and operational excellence of Concho will unlock even more value for shareholders,” he said. “The combined company will have the vision and necessary financial strength to efficiently develop the tremendous resource potential of these assets with large-scale projects.”
The deal is expected to close in the third quarter.
Stock movement and oil prices
Following the acquisition announcement, Concho shares fell over 8% while RSP shares climbed more than 15% on Wednesday. Concho closed at $143.25 a share and RSP closed at $45.
GuruFocus estimates Concho’s stock has fallen 6% year to date, while RSP Permian has risen 8%.
Oil prices were also lower on Wednesday.
While geopolitical tensions boosted the commodity last week, oil prices fell for a third straight day after the U.S. Energy Information Administration reported crude oil stockpiles increased by 1.6 million barrels. Following the announcement, Brent crude oil prices fell below $70 per barrel and U.S. West Texas Intermediate crude prices declined to below $65.
Disclosure: No positions.
