Cimarex Energy Co. and Cabot Oil & Gas Corp. on Monday agreed to combine in an all-stock merger, tying together their extensive operations in the Marcellus Shale, Permian and Anadarko basins.
Denver-based Cimarex controls 560,000 net acres combined in the Permian and Anadarko, while Houston-based Cabot has 173,000 net acres in the Marcellus. Cabot CEO Dan Dinges has been tapped as executive chairman, while Cimarex chief Tom Jorden would be CEO of the to-be-named company.
The merger is “the start of the next chapter in our histories,” Dinges said. Management has “long understood the long-term benefits of expanding geographically and beyond the Marcellus and adding more scale to our operations.
“This transaction does that,” creating an “operator with a geographic and commodity diversity scale, financial strength to thrive in today’s market and beyond across commodity price cycles.”
Jorden stressed that “natural gas liquids and oil bets are the way to play this. But when you look at the stability of the combined cash flow, you have to say, ‘wow.’ As I’ve said to the organization, we’re building an ark, not a party boat. This new company is an ark.”
Each Cimarex share would be exchanged for 4.0146 Cabot shares. The exchange ratio, together with closing prices for Cabot and Cimarex as of last Friday (May 21), reflects a combined enterprise value of $17 billion.
The mix of oil, natural gas liquids and natural gas assets “will dampen the impact of price swings on any single commodity,” Jorden said.
Expectations are that the combined entity could generate $4.7 billion in free cash flow (FCF) from 2022-2024, which would represent more than one-third of the new entity’s market capitalization, Jorden said. The FCF outlook is assuming average prices of $55/bbl West Texas Intermediate oil and $2.75/Mcf Henry Hub natural gas.
The mega merger “is not about the next quarter,” Jorden said during the hour-long conference call. “It’s about the next decade.” The transaction is “about the 2020s and into the 2030s.”
The exploration and production companies have no overlapping infrastructure. However, “one plus one is not the way to look at this deal,” Jorden said. “We’re not interested in getting bigger but in building a better company…The combined entity is a better company than either individually…This flat out builds a better company.”
‘Market Roller Coaster’
The combination also would allow natural gas juggernaut Cabot and liquids-heavy Cimarex to get off the “commodity roller coaster,” Jorden told investors. A “single commodity” producer or “single basin” operator “is susceptible to the market roller coaster.”
The challenge for producers today is “the ability to sustain our performance over all things that swing around us,” Jorden said, citing the “commodity cycles, basin differentials, asset performance and the regulatory environment.” There also are the “demands” of environmental, social and governance (ESG) initiatives, as well as striving to improve efficiencies.
“All of those challenges are easier to face in this combined platform…This company is built for the long term, and we’re going to thrive in a way that either one of us singly couldn’t…That’s why we are doing this transaction.”
Cimarex recently sold off some Oklahoma and Texas Panhandle assets, but management said the Midcontinent remained a key part of the portfolio. According to Morgan Stanley Research, Cimarex is one of the top U.S. upstream players with exposure to a potential federal land leasing ban, with most of its Permian holdings in the Delaware sub-basin. Federal oil and gas leasing is under the microscope by the Biden administration.
Meanwhile, Cabot produced 2.29 Bcfe/d during 1Q2021, all natural gas produced solely in Susquehanna County, PA. That was down slightly from 2.36 Bcfe/d in 1Q2020. In early May, full-year guidance remained at 2.23-2.28 Bcfe/d.
Additional mergers and acquisitions (M&A) are not off the table either.
“We remain on the offensive,” Jorden said. “If there are any assets that are more valuable in our hands, we’re going to jump at it…We know how to do this…Stay tuned; we’ll be active. We do have the organizational capacity to look over the fence. There are a lot of quality assets in our business, and quite frankly, they would be better in our hands than in others.”
Within two years of closing, annual general and administrative cost synergies were estimated at $100 million. The combined business is expected to have pro forma liquidity of $2.2 billion.
Cabot and Cimarex plan to build on their ongoing ESG efforts by, among other things, continuing to link executive compensation to ESG performance. Cabot CFO Scott Schroeder has been named CFO of the combined entity. The leadership team is to include executives from Cabot and Cimarex. The board would be evenly split, with five directors each from the current boards, including Dinges and Jorden.
More color about the new name of the company and change in management controls are expected in future filings.
The share price for both companies tumbled on Monday after the announcement, with each trading down near 7% at midday.
Cabot appeared well positioned to create value from its Marcellus assets without a merger, according to NGI’s Patrick Rau, director of Strategy & Research.
“I get geographic and commodity diversification, but investors can create that on their own by just buying shares of different companies. There aren’t many operational synergies here…”
Cabot and Cimarex are “just cutting costs a bit by eliminating dual legal, sales and accounting departments, etc.,” he said.
Rau said he wondered if this was a “kind of admission that Cabot didn’t want to be viewed as a ‘boring ‘ol utility…with tons of free cash flow and dividends but no real excitement. If so, is this a sign or a fear that producers have swung too far to the conservative side of the risk-return spectrum in the eyes of investors?
“Cabot was well on track to create strong free cash flow and positive returns on invested capital on its own. Did they really need to do this?
“I see their logic for it, but I’m not buying it.”
Enverus senior M&A analyst Andrew Dittmar said the “deal comes as a bit of surprise and may have a less clear story to tell investors.” Previous mergers “have generally involved in-basin consolidation with its easy readthrough to economies of scale and efficient operations.”
Some investors, Dittmar said, “may wonder why in-basin opportunities weren’t pursued ahead of a surprising multi-basin deal.”
Public producers generally “have been more likely to exit toward single-basin status than strike out into new areas,” he said. For example, Oasis Petroleum Inc. recently announced it would sell off its Permian assets to focus on the Williston Basin.
Cimarex and Cabot each “bring something unique to the table as they work to add up to an accretive deal,” Dittmar said. “Cabot’s perceived weakness was its longer-term inventory runway.”
However, Cimarex’s Permian position “addresses inventory concerns, while adding the ability to shift capital expenditures between gas and oil depending on the relative performance of the commodities.”
The combination would shift the Cimarex commodity mix “substantially toward gas (79% pro forma versus 42% currently) showing a bullish outlook for the commodity at this point. Cimarex’s Anadarko position would seemingly play a minor role in the combined company.”
Tudor, Pickering, Holt & Co. (TPH) analysts last Friday had recommended that clients “looking to safely own the upside to gas” consider Cabot because of its “best-in-class balance sheet and ability to pay out a significant portion of FCF in the form of dividends in ‘21 and ’22.”
TPH analysts had said a “combination of rising gas prices and limited need for further debt reduction” would “open the door” for an additional bump to returns to Cabot shareholders.
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