Dallas Oil Producer's $8 Billion Sale Price Could Spark Permian Basin ‘arms Race'

Concho Resources Inc. will buy rival shale oil producer RSP Permian Inc. in an $8 billion all-share deal, creating one of the largest producers in the region at the center of America's energy boom.The deal for the Dallas-based company is the largest ever focused exclusively on the Permian, topping Exxon Mobil Inc.'s acquisition of assets from the Bass family for as much as $6.5 billion last year and Encana Corp.'s purchase of Athlon Energy Inc. for $7.1 billion in 2014."The deal has the potential to spark an arms race in the region," said Roy Martin, senior analyst at consultant Wood Mackenzie Ltd. in London. "It's going to send a shiver down the spines of other companies."Concho's move comes as both oil majors and U.S. independent energy companies focus spending in the Permian, a region straddling West Texas and southeast New Mexico where strata of oil-bearing rock hold billions of barrels of oil.Capital IntensiveFor the last couple of years, oil executives have talked about the need for mergers in the region, historically dominated by medium-size companies rather than giants like Exxon or Chevron Corp. Creating super-sized shale producers could reduce operating costs as the techniques used to squeeze oil from shale rock become more capital intensive. For example, companies are drilling long horizontal wells as long as 10,000 feet (3,000 meters), often straddling acreage owned by several operators.Concho, with a market value prior to the deal of more than $23 billion, will pay 0.32 shares for each share of RSP. That's equal to $50.24 per RSP share, approximately a 29 percent premium to Tuesday's closing price. After the deal closes, Concho's shareholders will own approximately 74.5 percent of the combined company, with RSP shareholders owning the rest. Concho will also take on $1.5 billion of RSP's debt, bringing the total deal value to $9.5 billion."This combination allows us to consolidate premier assets that seamlessly fold into our drilling program, enhance our scale advantage and reinforce our leadership position in the Permian Basin," Concho Chief Executive Officer Tim Leach said in a statement.Concho, which will remain headquartered in Midland, said it expects the transaction to close in the third quarter of 2018.Concho pumped the equivalent of 193,000 barrels a day last year, while RSP produced 55,000 barrels a day, according to the companies' annual accounts. Concho said the combination will create the largest crude oil and natural gas producer from unconventional shale in the Permian.Morgan Stanley & Co. LLC is acting as exclusive financial adviser to Concho, and Sullivan & Cromwell LLP and Gibson, Dunn & Crutcher LLP are acting as legal advisers. Tudor, Pickering, Holt & Co. is acting as exclusive financial adviser to RSP, and Vinson & Elkins LLP as legal adviser.Javier Blas, Bloomberg  Continue reading...

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