U.S. oil and gas producer Devon Energy Corp said on Monday it will buy shale-oil rival WPX Energy Inc for $2.56 billion as it looks to boost its presence in the top U.S. oilfield.
The all-stock deal comes as U.S. shale companies have posted big losses on weak crude prices amid the COVID-19 pandemic and have struggled to raise new capital to restructure debt.
But as producers seek out combinations to survive the coronavirus-induced slump in demand, deals at little or no premium are becoming the norm.
“This cycle was driven by COVID, but you never know when the next cycle will happen, so we’re building a combined company that has the capabilities to withstand all the headwinds but can really prosper in better times,” Rick Muncrief, chief executive of WPX, told Reuters.
Investors cheered the deal: WPX shares closed up 16.4% at $5.17, while Devon rose 11.1% to $9.80.
WPX’s largest shareholder, EnCap Investments, will back the combination and vote its 27.3% stake against any alternative proposal that WPX might receive, according to a filing.
Devon’s deal is the second big merger after a price shock in April. In July, Chevron Corp agreed to buy Noble Energy Inc for $5 billion in stock and the assumption of debt.
Devon said the deal, expected to close in early 2021, will help cut costs and increase annual cash flow by $575 million by the end of next year.
The combined company, in which Devon will own 57% stake, will hold 400,000 net acres in the Delaware Basin of West Texas and southern New Mexico, and can produce 277,000 barrels of oil per day.
It will pay dividends using a “fixed plus variable” strategy, issuing a set 11 cents per share per quarter along with up to 50% of the remaining free cash flow.
Such a payout plan is seen as a new model for the industry that has fallen out of favor with investors after years of poor returns.
As part of the deal, WPX shareholders will get 0.5165 share of Devon common stock for each share of WPX common stock owned.
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