U.S. shale oil producers Devon Energy will get kotra energy corp. Spending nearly $26 billion to create a domestic oil and gas giant second only to a household name Exxon Mobil, Chevronand ConocoPhillips In terms of absolute output, the two companies announced on February 2.
After several years of rapid consolidation in the energy sector, trading slowed sharply last year as oil prices fell as OPEC increased output and the Trump administration imposed a slew of tariffs around the world. Now, as crude oil prices stabilize—albeit at a lower level– Analysts say mergers and acquisitions are making a comeback.
The close, all-stock merger creates the largest oil and natural gas producer in the booming western lobe of the Permian Basin – the Delaware Basin in western Texas and southeastern New Mexico. It’s the biggest oil and gas merger in two years Diamondback Energy Buy Endeavor Energy Resources to create a giant in the Midland Basin in the eastern reaches of the Permian.
The combined Devon enterprise will be worth $58 billion, including debt. The deal, excluding premiums, values Coterra at about $21.5 billion, not including about $5 billion in assumed debt.
The Delaware Basin accounts for just over half of expanded Devon’s 1.6 million barrels of oil equivalent per day, but the company also has a sizable footprint in Oklahoma, Pennsylvania, North Dakota, Wyoming and the Eagle Ford Shale in southern Texas.
“The Delaware is Coterra’s crown jewel asset and Devon’s crown jewel asset,” Devon CEO Clay Gaspar said. wealth In a phone interview. “When you combine those two, that’s Delaware’s primacy.”
Andrew Dittmar, principal analyst at Enverus Intelligence Research, said that strategically, the deal makes a lot of sense. “It’s becoming increasingly difficult to combine these large mergers with the number of consolidations we see in 2023 and 2024. There are not many very logical consolidation targets left. Investors have been skeptical of these deals that appear to be scale for the sake of scale. They really want to see these businesses overlap.”
stars align
Gaspar will continue as Devon CEO, while Coterra CEO Tom Jorden will serve as non-executive chairman. Devon will move its headquarters from Oklahoma City to Coterra’s headquarters in Houston while pledging to maintain a strong presence in Oklahoma.
“With these trades, you can trade when the time comes,” Gaspar said.
Devon expands significantly through acquisitions in early 2021 WPX Energyand later that year a merger created Coterra cimarex energy corp. and cabot Oil and gas. After about five years, Gaspar said, the time will come for the next step of change. Coterra is ready to explore its options.
“The stars started to align, and then over the last several months, Tom and I did the hard work of figuring out how we could work together to build a true merger that would take the best from both sides,” Gaspar said.
Gaspar said that while increasing scale and drilling numbers is critical, “it’s not just about getting bigger.” The operational synergies generated in the Delaware Basin and the Anadarko Basin in Oklahoma are significant, he said. He and Jordan identified $1 billion in synergies by the end of 2027, with $350 million coming from capital expenditure reductions, $350 million from annual operating efficiencies and $300 million from job cuts and lower corporate costs.
The deal is expected to close by the end of June, with Devon shareholders owning 54% of the combined company. Devon will control six of the 11 board seats.
Delve into Delaware
Gaspar said that once the deal closes, management will decide whether to “double down” on its investment or sell any of its geographic assets. “We’re going to be ruthless capital allocators. These individual assets need to compete.”
But the Delaware Basin will certainly remain a focus.
“This is really going to be a strong force in Delaware, and it’s definitely a project that you want to have in the Permian Basin as the core of your company, if you can,” Dittmar said. “This is the highest quality rock in the Lower 48.”
While the Midland Basin is the most mature part of the Permian Basin and has the most infrastructure and low-hanging fruit, the Delaware Basin arguably has the most long-term potential.
Delaware essentially provides oil and gas columns in varying layers 5 miles underground, allowing Devon and others to drill to multiple depths on the same acre over the next few years.
“They always say the best place to find oil is where oil has been found, and that gives us confidence in the Delaware Basin,” Gaspar said.
“As opposed to the Midland side, Delaware is generally a little bit deeper. The pressure is a little bit higher, the costs may be a little bit higher, but the economy can withstand anything the U.S. throws at it,” he added. “It’s really a phenomenal winning asset.”
At times, the Midland Basin is more valuable because of the higher proportion of more valuable crude oil compared to natural gas. However, the timing is perfect for natural gas-rich Devon, Delaware, as natural gas exports surge and gas prices rise. Domestic power demand surges Powering the boom in data centers and artificial intelligence.
“The natural gas percentage is actually a virtue these days because we get this incredible insatiable demand,” Gaspar said.
Gaspar said the combined acreage gives Devon more supply chain negotiation power, more land to drill longer well legs and more leverage to do land swap deals to truly optimize its position going forward.
Now, Gaspar must move from Oklahoma to Houston, acknowledging the headquarters change as a negotiated concession, albeit one that made Devon the largest oil and gas city in the United States.
“You get what you put in. That’s critical to getting the deal done,” he said. “When we see the value created by the combined company, we’re willing to bring it to the table.”