Cimarex Buys Resolute For $1.6B To Expand Delaware Presence

The Permian deal frenzy continues to sweep the U.S. oil industry, which has created a trendof consolidation in the prolific shale play. The latest energy playerto join the bandwagon is Cimarex Energy Co (NYSE:XEC) . The companyis set to acquire Resolute Energy Corp (NYSE:REN) in a deal valued at about $1.6 billionto bolster Permian presence.

Post the announcement, shares of Resolute increased 14% to close at $34.71 on Nov 19. Meanwhile, shares of Cimarex inched down 1% to close at $87.90, primarilyas a reaction to the assumption of the takeover target's debt and apprehension of sluggish growth. Nevertheless, many analysts find the deal lucrative, owing to the associated synergies associated and long-term opportunities.

Details of the Deal

Per the deal, Resolute shareholders can exchange 0.3943 shares of Cimarex common stock valued at $35 per share in cash or a combination of $14 per share in cash and 0.2366 share of common stock. Cimarex’s bid represents around 15% premium to Resolute's closing share price of $30.49 on Nov 16, thus valuing Resolute at $35.06 a share. The deal assumes Resolute's net debt estimated at $710 million. The share of stock and cash is subject to proration for total stock and cash mix of 60% and 40%, respectively.

Subject to satisfactory closing conditions along with shareholders’ consent and other regulatory approvals, the deal is set for closure by the first quarter of 2019.

Post the culmination of the deal, Cimarex will own about 94.4% stake in the combined entity and Resolute will hold the remaining 5.6%. Currently, Cimarex carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The cash relatedtothe transaction is anticipated to be funded through a combination of cash on hand and borrowings under Cimarex's revolving credit facility.

Benefits of the Deal

The deal isa prudent move by Cimarex as it is likely to be accretive to the company’s earnings and non-GAAP cash flow.

The agreement will add around 21,100 net acres of Reeves County acreage to Cimarex’s portfolio, expanding its position by 34% to a total of 83,158 acres.

Pro-forma production in third-quarter 2018 was 253,000 barrels of oil equivalent per day (Boe/d).The deal adds 35,000 barrels of oil equivalent per day (boe/d) to Cimarex's production base, of which oil will be 45%.

Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, courtesy of the integration of asset and systems.

Consolidation in the Permian

Even during oil slump, the Permian Basin continued to generate money for many oil producers owing to its low cost and high margin operational structure. The region's extensive pipeline infrastructure, plentiful labor and suppliesas well asrelatively warm winters facilitateyear-round operations. Oil production in the region has been recording significant growth, with the current capacity of churning around 3 million barrels per day (Bpd). Productionis expected to rise another 2 million Bpd by 2025.

Recently, there has been a flurry of oil deals in the region owing to its attractive economics. The crude prices have improved drastically from the low levels reached in early 2016. Consequently, acquisition deals have increased with more than $30 billion transactions centered in Permian so far in 2018. In March, Concho Resources (NYSE:CXO) Inc inked a $9.5-billion deal to acquire RSP Permian. In July, BP plc (NYSE:BP) acquired Permian assets worth $10.5 billion from BHP Billiton (LON:BLT) PLC. A few days ago, Occidental Petroleum Corporation (NYSE:OXY) inked a $2.6-billion deal to vend its oil export terminal near Corpus Christi and a West Texas pipeline network to concentrate focus on Permian. The $9.2-billion deal between Diamondback and Energen deal will boost the combined firm’s competitive positioning.

However, in Permian, there is dearth of pipeline capacity for transporting oil to Gulf Coast export facilities, major refinery terminals and principal hubs like Cushing. This has compelled Midland operators to sell stranded oil at a large discount to that in Cushing. This problem will remain an overhang until the new pipeline projects that are anticipated to be commissioned not before 2019-end.

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BP p.l.c. (BP): Free Stock Analysis Report

Resolute Energy Corporation (REN): Free Stock Analysis Report

Cimarex Energy Co (XEC): Free Stock Analysis Report

Occidental Petroleum Corporation (OXY): Free Stock Analysis Report

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