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In an eyebrow-raising deal that runs counter to the recent pure-play trend we’ve been seeing in oil and gas consolidations, today Cimarex and Cabot Oil & Gas COG announced an all-stock merger. The deal will create a company with an enterprise value of $17 billion and a portfolio of assets split between Cimarex’s core 560,000-acre position in the oily Permian basin of west Texas, and Cabot’s core 173,000 acres in northeastern Pennsylvania’s Marcellus shale gas fields.

It’s very nearly a 50/50 deal. Cimarex (market cap $7.3 billion) shareholders will get 50.5% of the new company, which hasn’t yet been named. Cabot ($7.1 billion) gets 49.5%. Both sides will get five seats on the board.

Tying together two wildly disparate operations with zero overlapping businesses was an “unexpected combo,” noted William Janela of Credit Suisse in an analyst note this morning.

Cabot has been eyed as a potential takeover target for acquisitive EQT EQT , which recently acquired Alta Resources to consolidate in the Marcellus. Meanwhile, Cimarex has long been seen as a favorite takeover target by bigger Permian-focused players looking to gain heft and synergies. That was the rationale behind Pioneer Natural Resources PXD buying Parsley Energy and DoublePoint; Devon buying WPX Energy WPX and ConocoPhillips COP acquiring Concho last year. Back in 2018 when Cimarex itself acquired Resolute Energy for $1.6 billion their acreage holdings were right next to each other.

After so many pure-play match-ups, the Cimarex-Cabot combo arrived out of left field. But it makes total sense when you consider that the biggest obstacle to consolidation in the oil and gas sector has always been ego. As analyst Paul Sankey pointed out in his note this morning, Cabot may “be concerned about the ongoing Marcellus consolidation that EQT is undertaking as a risk to their independence.” Likewise, Cimarex CEO Tom Jorden “might be concerned that any takeover of his company would end his CEO tenure.”

By going in 50/50, the management teams of both Cabot and Cimarex will have a better chance of controlling their own destinies than had they sold to a bigger operator. According to the announcement, Cabot CEO Dan O. Dinges, 67, will be chairman of the new company, while Jorden, 63, will be CEO. Cabot CFO Scott Schroeder will continue in that role.

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By the terms of the deal, Cimarex holders will get 4.0146 shares of Cabot for each share. Dinges has 4.4 million shares worth about $75 million. Jorden will have 2.7 million shares after the deal. The biggest active institutional holder is Howard Gleicher’s Aristotle Capital, with about 10%.

The combined company will produce the energy equivalent of 600,000 barrels of oil per day. At commodity prices of $55/bbl oil and $2.75/mcf natural gas, they figure they have 20 years of drilling inventory. Base dividend will be 50 cents per year (2.8% yield), they say, with another 50 cent special dividend planned upon closing of the deal. Capital spending is expected at $1.3 billion this year.

Jorden has been in the top ranks of Cimarex ever since it was formed in 2002 by the spinout of the exploration assets of Tulsa-based drilling rig contractor Helmerich & Payne HP . Dinges has been CEO of Cabot since 2002. In 2008 Cabot drilled its first horizontal well in the Marcellus shale, and now does about 80 a year.

Source: Forbes – Money

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