The latest deal in a wave of US energy consolidation was announced on Monday, with shale oil producer Cimarex Energy and Cabot Oil & Gas revealing a “merger of equals” that will create a group with an enterprise value of $17bn.
The combination brings together Cimarex’s oil assets in the prolific Permian shale field of West Texas and New Mexico, and Cabot’s acreage in north-east Pennsylvania’s Marcellus Shale, the biggest US gasfield.
“This transformational merger will combine our top-tier assets and advance our shared focus on delivering superior returns for investors,” said Thomas Jorden, Cimarex chief executive.
Dan Dinges, Cabot chief executive, said the deal would “create a free cash flow focused, diversified energy company with the scale, inventory and financial strength to thrive across commodity price cycles”.
The combined debt of the two companies is about $3.3bn, according to S&P Global Market Intelligence, while they each had a market capitalisation of roughly $7.1bn before the deal was announced.
The merger is the latest in a string of deals struck in recent months as the US oil patch recovers from last year’s pandemic-induced crude-price rout, which bankrupted scores of oil companies and sent years of US crude production growth into reverse.
Since the start of the fourth quarter last year, about $50bn worth of deals have been struck. Last month Pioneer Natural Resources bought private equity-backed DoublePoint Energy in a $6.4bn all-stock deal and EQT Corporation, another Marcellus gas producer, said it was buying Alta Resources for almost $3bn.
Executives in the US shale sector, out of favour on Wall Street after years of profligate spending, debt-fuelled drilling and deep losses, have promised they will now prioritise shareholder returns and profitability over new supply increases.
The pledge has mostly held, with producers eschewing a new drilling surge despite a recovery in oil prices, instead using the windfall to repair balance sheets, reduce liabilities and return capital. Mergers have mostly been completed using equity, not cash.
Analysts said the focus of the dealmaking remains on cash flow, a trend helped by a 70 per cent rise in US oil prices since November.
“This is the kind of consolidation big investors are looking for,” said Andrew Gillick, managing director and energy sector strategist at consultancy Enverus. Cabot was a prize for Cimarex, he suggested, offering “stable production, cost cuts and a cash flow machine”.
Cabot had been a much-rumoured target for months.
Cimarex and Cabot said the combined company would deliver cumulative free cash flow of $4.7bn between 2022 and 2024 at roughly current oil and gas prices. The new company could supplement a $0.50 annual dividend with a variable payout equivalent to at least half of quarterly cash flow, they said.
Cimarex shareholders will receive just over four shares of Cabot stock for each share in Cimarex. They will hold 50.5 per cent of the new company on a diluted basis. The companies said the deal was expected to close in the fourth quarter of 2021.
The new company, which is yet to be named, will be based in Houston. JPMorgan and law firm Baker Botts are advising Cabot. Tudor, Pickering, Holt & Company and law firm Wachtell, Lipton, Rosen & Katz are advising Cimarex.