Cabot Oil & Gas Corp and Cimarex Energy Co agreed a merger on Monday to form a U.S.-wide oil and gas firm with an enterprise value of some $17 billion, a deal analysts termed surprising in a sector recently focused on “pure-play” models.
Cimarex shares tumbled 7.2% to $66.07, while Cabot’s stock fell 6.9% to $16.59.
The deal was a “surprise”, according to at least two analysts, as it brings together Cabot’s gas-rich Marcellus shale positions in the U.S. northeast and Cimarex’s oil-heavy acres in West Texas.
U.S. shale producers have in recent years tended to focus on single geography to optimize cost savings and attract investors, though the pure-play model has not stopped money managers exiting amid poor returns versus other economic sectors and environmental concerns.
Under the deal terms, Cimarex shareholders will get 4.0146 shares of Cabot stock for each share held and will own 50.50% of the combined company.
At an implied equity value of $7.4 billion, or $71.50 per Cimarex share, the deal reflects a less than 1% premium to the oil producer’s Friday close.
Keybank analysts expressed concern the deal turns Cimarex into a gas producer and takes away any benefits from rising oil prices. They also highlighted the meager premium.
Speaking to Reuters, Cabot Chief Executive Dan Dinges said the combined entity – to be named at a later date – could hold appeal for shareholders in a way neither company could individually.
“You can create a company with sustainable free cash flow, the returns that all shareholders want through dividends, and get to the point of having the scale that the generalists look for to make a long-term investment,” he said.
Cimarex top boss Thomas Jorden told Reuters the merged company would be more resilient to commodity price cycles.
“Great companies are prepared for the swings in commodity prices, and this combination allows us to be ready for those,” said Jorden, who will be CEO of the merged company, with Dinges becoming chairman.
A combined Cabot-Cimarex plans to distribute around half the free cash flow it generates through dividends and will pay a 50 cent per share special dividend after the deal closes, expected in the fourth quarter.
The deal comes on the heels of EQT Corp’s plans to buy Appalachian basin rival Alta Resources earlier this month and Pioneer Natural Resources’s agreement in April to buy privately held DoublePoint Energy for $6.4 billion.
Source: Reuters.com