What we know, and what we still don't, about the Devon Energy, WPX Energy merger - Oklahoman.com

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NewsOK: Oklahoma City News, Sports, Weather & Entertainment

Jack Money

by Jack Money

Published: Tue, September 29, 2020 1:04 AM Updated: Tue, September 29, 2020 1:15 AM

Oklahoma City-based Devon Energy and Tulsa-based WPX Energy are merging. Devon Energy Tower is seen in the Oklahoma City skyline. [THE OKLAHOMAN ARCHIVES]Oklahoma City-based Devon Energy and Tulsa-based WPX Energy are merging. Devon Energy Tower is seen in the Oklahoma City skyline. [THE OKLAHOMAN ARCHIVES]

On Monday, Tulsa-based WPX Energy and Oklahoma City-headquartered Devon Energy announced a plan to merge in an all-stock deal that would, based on Friday’s stock values for both, create a new company with a market capitalization of $12 billion.

The agreement, which already has received unanimous approval by both companies’ boards of directors and awaits stockholder approvals, would allocate a 0.5165 share of Devon stock to the holder of a WPX share.

Officials state the deal would create a dominant position for a new company that has a centerpiece operational area of about 400,000 acres in the Delaware Basin covering much of west Texas and eastern New Mexico.

What we know

Assuming the deal closes in the first quarter next year, the new company will continue as Devon Energy, with original Devon shareholders owning 57% of the combined company.

Plans call for the combined company to continue to operate from Devon’s corporate headquarters in Oklahoma City.

Several front-line executives at WPX, including CEO Rick Muncrief, would step into similar or identical leadership roles at the new Devon.

Devon’s CEO Dave Hager, meanwhile, would turn over his job to Muncrief to become the executive chairman of an expanded board of directors.

The transaction would create one of the nation’s largest unconventional oil producers (using horizontal wells targeting shale plays) with production of 277,000 barrels per day, they said. Nearly 60% of that would come from its Delaware Basin operations, which is geographically diversified between New Mexico and Texas, with only 35% of its leasehold on federal lands. Currently, the two companies have 17 drilling rigs working in the basin. Other production would come from plays the companies have in the Anadarko, Powder River and Williston basins and the Eagle Ford Shale field.

The combined-companies’ enhanced scale, officials stated, would improve margins, generate a higher free cash flow and the financial strength to accelerate the return of cash to shareholders through an industry-first “fixed plus variable” dividend strategy. The new Devon would prioritize free cash flow, while holding its production growth to 5% or less annually, applying that additional cash to improving dividends, reducing debt and repurchasing shares off the open market.

Officials stated they expect the combined companies would achieve cost savings sufficient to generate $575 million in annual cash flow improvements by year-end 2021.

What we don’t yet know

Beyond top leadership ranks, it was uncertain Monday how the combination might impact overall workforces for each of the separate companies.

As of Monday, WPX employed 600, with about 400 of those at its Tulsa corporate headquarters in the BOK Tower and the remainder in the companies’ field offices both in the Delaware and Williston basins.

Lisa Adams, Devon’s communications director, said Monday it employed about 1,400, company wide, with about 850 in Oklahoma City.

Both Adams and Kelly Swan, WPX Energy’s director of community relations, said discussions are ongoing between the companies about exactly where and how employees of the combined companies will work.

However, while WPX currently is building a new corporate headquarters in Tulsa on a property that spans a downtown block between ONEOK Field and the Guthrie Green Urban Park, a letter Swan sent to nearby property owners on Monday indicated it is likely it won’t move into the completed 11-story building once it is finished next year.

“Like many of you and your businesses, we are not immune to the effects of what COVID has wrought on the economy and our industry. Quite simply, our world has changed like night-and-day since we announced our plan,” Swan wrote. “Oil prices, oil demand and our stock price are not what they were. We recognize this will ultimately impact our employees and our presence here, likely in profound ways. At this point, moving into the new building is an unlikely scenario.”

But Swan also wrote that WPX doesn’t plan to just walk away.

“We are extremely mindful of our reputation and relationships in Tulsa, wanting to leave a legacy that’s meaningful to our friends and the city. Construction is proceeding as planned, with ‘topping out’ (reaching its full height) anticipated for April. From a business standpoint, the project represents a significant investment on our part. We obviously want to optimize this investment, which means finishing the project in some way — either in its original or a modified form — to create a premium, marquee property for which the community is proud. In the meantime, we’ll be exploring a variety of options to leverage the office in a way that benefits Greenwood and the Arts District.”

Deal aims to stop the bleeding

Both companies were hit hard by the collapse in energy prices earlier this year.

WPX posted a second quarter 2020 net loss of $409 million, or 73 cents per share, on total revenues of $33 million (after taking a $275 million hit on derivatives settlements).

WPX also is carrying a significant amount of debt, with about $3.2 billion in senior, unsecured debt maturing various years between now and 2030.

Devon posted a second quarter 2020 net loss of $670 million, or $1.78 per share, on total revenues of $394 million.

It too holds a massive amount of debt ($4.4 billion), however, only $558 million of that will mature during the next decade.

Devon officials stated earlier this year it held $4.7 billion in liquidity, with $1.7 billion of that in cash.

Analyst’s take

“Both companies bring quality assets in the play to the table, with the deal having the added bonus for Devon of decreasing reliance on federal lands at a time the outlook for future drilling has some question marks,” said Andrew Dittmar, Enverus’ senior mergers and acquisitions analyst. “This deal represents the form of shale company consolidation that many across the industry have been looking for. You have two exploration and production companies with complimentary positions agreeing to an equity exchange at little-to-no premium.

"The selling point for investors is that the larger combined company will have the scale and efficiencies to navigate a challenging price environment and generate free cash flow for its investors. With the depth and quality of inventory available, the Delaware and Midland subbasins of the Permian are likely to be at the forefront of more consolidation deals than any other area.”

Executives' comments

Devon and WPX executives Monday noted the two companies share an uncompromising commitment to environmental and social governance issues, to employee safety and environmental responsibility, adding they plan to continue to work on methane emissions reductions and policies and practices to advance their inclusion and diversity efforts.

“This merger is a transformational event for Devon and WPX as we unite our complementary assets, operating capabilities and proven management teams to maximize our business in today’s environment, while positioning our combined company to create value for years to come,” said Dave Hager, Devon’s current CEO. “Bringing together our asset bases will drive immediate synergies and enable the combined company to accelerate free cash flow growth and return of capital to shareholders. In addition to highly complementary assets, Devon and WPX have similar values, and a disciplined returns-oriented focus, reinforcing our belief that this is an ideal business combination.”

Rick Muncrief, WPX’s CEO, said the deal will enable it to meet its five-year targets outlined in 2019. “The combined company will be one of the largest unconventional energy producers in the U.S., and with our enhanced scale and strong financial position, we can now accomplish these objectives for shareholders more quickly and efficiently. We will create value for shareholders of both companies through the disciplined management of our combined assets and an unwavering focus on profitable, per-share growth,” he said.

Related Photos

<strong>The new company following a Devon Energy and WPX Energy merger would base its corporate headquarters at Devon's Oklahoma City home. [PROVIDED BY DEVON ENERGY]</strong>

The new company following a Devon Energy and WPX Energy merger would base its corporate headquarters at Devon's Oklahoma City home. [PROVIDED BY DEVON ENERGY]

Photo -  The new company following a Devon Energy and WPX Energy merger would base its corporate headquarters at Devon's Oklahoma City home. [PROVIDED BY DEVON ENERGY] The new company following a Devon Energy and WPX Energy merger would base its corporate headquarters at Devon's Oklahoma City home. [PROVIDED BY DEVON ENERGY] Photo -  WPX Energy drills and produces wells not only in the Delaware Basin, but also in North Dakota's Williston Basin. [PROVIDED BY WPX ENERGY] WPX Energy drills and produces wells not only in the Delaware Basin, but also in North Dakota's Williston Basin. [PROVIDED BY WPX ENERGY] Photo -  A Devon Energy well produces from the Delaware Basin. [PROVIDED BY DEVON ENERGY] A Devon Energy well produces from the Delaware Basin. [PROVIDED BY DEVON ENERGY] Photo -  Hager Hager Photo -  Muncrief Muncrief Photo -  Oklahoma City-based Devon Energy and Tulsa-based WPX Energy are merging. Devon Energy Tower is seen in the Oklahoma City skyline. [THE OKLAHOMAN ARCHIVES] Oklahoma City-based Devon Energy and Tulsa-based WPX Energy are merging. Devon Energy Tower is seen in the Oklahoma City skyline. [THE OKLAHOMAN ARCHIVES]

Jack Money

Jack Money has worked for The Oklahoman for more than 20 years. During that time, he has worked for the paper’s city, state, metro and business news desks, including serving for a while as an assistant city editor. Money has won state and regional... Read more ›

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