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Vol. 25, No.43 Week of October 25, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Oil patch insider: More competition for O&G capital for Alaska from L 48 shale plays

Kay Cashman

Petroleum News

Alaska’s largest oil producer ConocoPhillips’ planned acquisition of Concho Resources in a $9.7 billion all-stock deal gives the big independent more investment opportunities in Lower 48 and Canada unconventional plays, a region that already competes with the North Slope for capital.

Not to suggest ConocoPhillips is going anywhere, but in October 2014 Alaska lost Pioneer Natural Resources to the lure of the Lower 48 shale fields. For that matter, as BP Exploration was preparing to leave Alaska it expanded its Lower 48 unconventional holdings with a $10.5 billion acquisition of BHP’s American shale assets.

Of course, Houston-based ConocoPhillips is already an “unconventional powerhouse,” as it was recently described by Upstream. Absorption of the much smaller Midland, Texas-based Concho will give ConocoPhillips a huge footprint in the Delaware and Midland portions of the Permian basin, as well as solid positions in the Eagle Ford and Bakken in the Lower 48 and the Montney in Canada.

The deal, announced Oct. 19 and expected to close in first quarter 2021, will make ConocoPhillips the largest independent oil and gas company in terms of daily production, Houston Business Journal reported.

The agreement calls for Concho shareholders to receive 1.46 shares of ConocoPhillips common stock for each share of Concho, which represents a 15% premium to closing prices on Oct. 13, per the companies. ConocoPhillips shareholders will own about 79% of the combined company, with Concho shareholders holding the other 21%.

The combined enterprise value is expected to be approximately $60 billion - its pro forma net debt was $12 billion as of June 30.

By 2022 the companies said the combined company is expected to realize $500 million in annual cost and capital savings, thanks in part to lower administrative expenses and a reduction in its global exploration program.

The combined company will have pro forma production of more than 1.5 million barrels of oil equivalent per day.

After the acquisition closes, Concho Chairman and CEO Tim Leach will join ConocoPhillips’ board of directors and become an executive vice president of ConocoPhillips and president of the company’s Lower 48 business. He will report directly to ConocoPhillips Chairman and CEO Ryan Lance.

“Concho is a tremendous fit with ConocoPhillips,” Lance said. “Together, ConocoPhillips and Concho will have unmatched scale and quality across the important value drivers in our business: an enviable low cost of supply asset base, a strong balance sheet, a disciplined capital allocation approach … and great people. Importantly, the transaction meets our long-stated and clear criteria for mergers and acquisitions because it is completely consistent with our financial and operational framework.”

Sector consolidation is “both necessary and inevitable,” Lance told analysts after the announcement. “We both believe our industry needs solutions that address the lack of scale, poor returns and, increasingly, the challenges and opportunities of environmental, social and governance matters.”

Roughly half of the combined company’s production would be from the Lower 48, with 15% coming from Alaska and the remaining 35% from international assets (ConocoPhillips is active in 16 countries).

The company intends to return more than 30% of its cash generated from operations to shareholders through regular dividends and other distributions, consistent with ConocoPhillips’s current targets.

Lance said those payouts help distinguish ConocoPhillips from rival oil and gas companies.

“You’ve got to deliver financial returns in this business,” he said.

In its summary of the transaction’s benefits, ConocoPhillips said: “Massive, diversified and low cost of supply resource base provides years of high-value investments: The combined company will hold approximately 23 billion barrels of oil equivalent resources with an average cost of supply of below $30 per barrel WTI.”


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Moody´s gives deal thumbs up

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.