March 28, 2018 / 10:21 AM / a year ago

U.S. shale producer Concho offers $8 billion for rival RSP Permian

(Reuters) - U.S. shale producer Concho Resources Inc on Wednesday agreed to buy rival RSP Permian Inc in an $8 billion all-stock deal that could trigger a wave of consolidation in the fast-growing Permian Basin oilfield.

FILE PHOTO: An oil pump is seen operating in the Permian Basin near Midland, Texas, U.S., May 3, 2017. REUTERS/Ernest Scheyder/File Photo

The proposed deal is the largest in the shale patch since 2012 and adds momentum to producers looking to expand drilling in the West Texas and New Mexico shale hub. Permian oil production has soared, now running about 3 million barrels per day and expected to grow by another 2 million bpd by 2025.

Corporate mergers and acquisitions in the shale patch have been rare since the oil price collapse in 2014, although there have been large land purchases by Exxon Mobil Corp, Oasis Petroleum Inc and others. That could soon change, analysts say, with crude prices rising to above $64 a barrel.

“We wouldn’t be surprised if the larger, well-capitalized Permian players leverage their market premium to go after the smaller Permian producers,” said Andrew Dittmar, senior analyst at PLS Inc., a data provider that tracks oilfield mergers and acquisitions.

Smaller companies operating in the Permian, including Abraxas Petroleum, Lilis Energy and Jagged Peak Energy could be targets for consolidation, he said.

Concho Resources’ bid is a 29 percent premium to RSP Permian’s closing price on Tuesday. The per acre price is more than $70,000, one of the highest in the Permian, according to PLS. Concho’s shares fell 8.3 percent to $143.84 while RSP’s were up about 16 percent, both in morning trading on Wednesday.

Last year, Exxon agreed to pay up to $6.6 billion to double its Permian Basin holdings and Oasis Petroleum paid $946 million in cash and stock, or about $46,600 an acre, to gain a Permian foothold.

The acquisition “allows us to consolidate premier assets that seamlessly fold into our drilling program (and) enhance our scale advantage,” Concho Chief Executive Tim Leach said.

A deal would add about 92,000 acres in the Permian, increasing Concho’s total to 640,000, and lift its potential resources to about 2.2 billion barrels of oil equivalent, the companies said.

The combined company will be 74.5 percent owned by Texas-based Concho and have 27 rigs in the Permian, running the largest drilling and completion program there. [nBw34gllpa]

RSP shareholders will get 0.320 of Concho shares for each of their shares, worth about $50.24 per share. The deal is subject to approval by shareholders of both companies and expected to close in the third quarter of this year.

“Obviously it’s a good marker for the market,” QEP Resources Inc Chief Executive Charles Stanley told Reuters on the sidelines of the Scotia Howard Weil energy conference in New Orleans.

His company recently said it would sell assets in North Dakota and Louisiana and focus on the Permian Basin, allowing Denver-based QEP to more quickly cover its capital expenses by production.

The oil industry has been discussing the merits of merging resources in the busy Permian Basin as a way to reduce operating costs and increasing shareholder returns. Costs for fracking service are rising about 10 percent to 15 percent as more companies expand drilling to take advantage of higher crude prices.

The companies said including debt, the value of the deal is $9.5 billion. The equity value of the deal was calculated based on 155.53 million outstanding shares of RSP.

“This is a significant acquisition and a lot of synergies that make sense, said RBC analyst Scott Hanold, adding the 29 percent premium was a reasonable price to pay.

The acquisition is likely to add to Concho’s earnings in the first year after the deal closes, the companies said.

Reporting by Anirban Paul and Ahmed Farhatha in Bengaluru; Additional reporting by Ernest Scheyder and Gary McWilliams. Editing by Anil D'Silva, Bernard Orr and Shailesh Kuber

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