Moody’s Investor Service said Oct. 19 that ConocoPhillips’ acquisition of Concho Resources is “credit positive (COP A3 stable.)”
“Concho’s large-scale Permian operations will significantly enhance COP’s scale, diversification, and portfolio durability while simultaneously improving capital flexibility and cost efficiency,” Moody’s reported.
However, the transaction “comes at a time of low oil prices and heightened uncertainty around global economic and oil demand recovery. The greater exposure to shale assets will also increase COP’s relatively low (production) decline rate.”
ConocoPhillips will need to “close the transaction, execute from an operational standpoint, and achieve the planned cost synergies,” the investor service said.
Concho’s large production and reserves base as well as its extensive drilling experience in the Permian basin “will immediately transform COP into a leading Permian basin producer. Concho produced 320,000 barrels of oil equivalent per day in the second quarter of 2020 and had 1 billion of proved reserves (75% developed) at the end of 2019. The combined company will have over 400,000 boe/d of Permian basin production significantly increasing COP’s overall unconventional production, representing almost one half of future companywide production from about a third of total production today,” Moody’s said, adding that the acquisition “is consistent with COP’s long-term strategy of maintaining a sustainable asset base with low cost of supply, strong organic growth potential and manageable ESG risks.” (ESG stands for environmental, social and governance.)
ConocoPhillips will be paying “about $18/boe of PD reserves and $42,000 per flowing boe, which we view to be reasonable in today’s price environment. We estimate Concho’s breakeven cost to be around $30/boe. Concho’s 550,000 low-cost, oil-weighted, and mostly contiguous net leasehold acreage in the Delaware basin and Midland basin will provide COP a deep drilling inventory allowing significant capital and operational flexibility.”
The “contemplated combination synergies should also improve COP’s cost and return metrics over time,” Moody’s said.