Conoco / Concho deal dynamics, comparison to Oxy and UK/European Majors
I talk a little bit about credit here too...
Deal dynamics
Transaction value: $9.7bn
Acquiror: Conoco Philips
Acquiree: Concho Resources
Combined EV post transaction: Set to be around $60bn, which would be the largest independent O&G company in the world
Average cost to supply of combined group: $30/BBL WTI
Expected synergies: $500m of annual costs and capital savings by 2022
Format of transaction: All stock transaction, no debt.
Sustainability considerations of the deal
The deal press release states: “The combination creates a platform for leading the sector into the energy transition and a low-carbon future. The combined entity will be the first U.S.-based oil and gas company to adopt a Paris-aligned climate risk strategy to meet an operational (Scope 1 and Scope 2) net-zero emissions ambition by 2050.”
US companies focused on consolidation in O&G and lowering cost/bbl of production whereas UK/European Majors are spending on shift to renewables.
This looks to be the 3rd US focused E&P transaction in the US since mid-summer according to a US Bank. Meanwhile, UK and European Oil Majors appear to be focused on renewable energy plays rather than consolidating exposure in oil and gas. This might be due to greater pressures on sustainable investing in UK/Europe vs the US. Furthermore, with the ECB signaling its intent to buy Green bonds, there is an increasing spread differentia between financing costs of supporting cleaner energy vs fossil fuels.
Timing of the deal is interesting..
Conoco announced this deal just weeks before the outcome of the US election. This suggests that the management team of COP are agnostic over whether it is President Trump or VP Biden that wins the race to be President. As a generalist, it seems to me that Conoco are buying good assets really cheap when oil prices are at the low point in the cycle. This seems to be a consistent theme with the best acquirors in the corporate space.
Not tapping debt market – in contrast to Occidental
It does not look as if any public debt will be raised to finance the acquisition. This is in contrast to Occidental Petroleum (“OXY”s) acquisition of Anadarko which required significant debt issuance including preferred stock that was issued to Berkshire Hathaway. Oxy issued $13bn of bonds in August 2019 which added to the $40bn debt at the outset of the Anadarko acquisition.
Despite the ultra low borrowing costs on offer right now (even for good quality Oil companies), COP management sensibly does not appear to want to repeat what Oxy did and cause damage to both its credit rating and stock price.
Oxy bonds were some of the hardest hit during the peak of the credit market sell-off in March/April, as it also experienced ratings migration to junk, which resulted in a huge transfer of bonds from Investment Grade (“IG”) Benchmarks (and therefore IG ETFs) to HY benchmarks (and again HY ETFs).. I believe that Oxy were a handful of US issuers that probably motivated the Fed’s decision to buy HY ETFs and support to that market. Before the Fed stepped in, Oxy bonds struggled under the sheer weight of issuance since the IG investor base was larger than that of the HY space. Oxy now forms one of the top 3 issuers in the iShares Fallen Angel ETF
Useful links:
Forbes article on the acquisition including analyst views (very good article).
Deal factsheet from the company - Link
*Not investment advice, I own investments in the oil & gas sector*