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Cabot Oil & Gas and Cimarex on Monday announced a deal to emerge however investors reacted negatively with both stocks falling sharply. $COG closed down 6.8% and $XEC down 7.1%.

Cabot Marcellus

Image: Cabot Marcellus

The two similar-sized onshore oil & gas exploration companies announced they will merge in an all-stock merger of equals. The combined business will operate under a new name and boast an enterprise value of $17 bln.

Existing shareholder Split in the new company

  • Cabot shareholders will own 49.5% of the combined company
  • Cimarex shareholders will own 50.5%. 

Cabot CEO Dan Dinges will serve as executive chair of the board of the newly combined business, while Cimarex CEO Thomas Jorden will lead the company as CEO. The remainder of the company's leadership team will include executives from both Cabot and Cimarex.

Market Reaction May 24, 2021 Close

  • Cabot Oil & Gas Corp NYSE: COG  $16.60 ▼ 1.21 (6.79%) 
  • Cimarex Energy Co NYSE: XEC $66.14 ▼ 5.05 (7.09%) 

The companies are targeting annual G&A cost synergies of $100 mln within 18-24 months following the closing of the deal taking advantage of the combined economies of scale. The new larger size is expected to allow for the combined company to negotiate better prices for equipment and supplies. Critical at this time of supply lines squeezes and constraints.

The deal also adds geographic diversification.

Cabot has 173,000 net acres in the Marcellus Shale while Cimarex has 560,000 net acres in the Permian and Anadarko basins. The companies expect “a multi-decade inventory of high-return development locations in the premier oil and natural gas basins in the United States.” "The combination of Cabot and Cimarex will create a free cash flow focused, diversified energy company with the scale, inventory and financial strength to thrive across commodity price cycles," Cabot CEO Dan Dinges said in a statement.

Cabot and Cimarex Map

The timing of the deal appears to be opportune with oil prices recovering to over $65 WTI and $3 in the Henery Hub natural gas futures price sine the vaccine approval and distribution is improved confidence in the economy. The US economy is expected to post 6% GDP growth. globally economies around the world are opening.

The combined company is expected to support cumulative free cash flow of approximately $4.7 billion from 2022 to 2024 based on $55 per barrel WTI oil prices and $2.75 per MMBtu NYMEX natural gas prices.

This deal is set to close in 4Q21, with a risk for specualtors where energy prices will be then, higher or lower?  With this deal around 50-50 and both have nearly identical market caps in the low-$7 bln range expectations are of a smooth transition to the combined entity.

The stocks both traded lower on the news with disappointed that the deal was not struck at higher levels  There were expectations that either company was going to be acquired by a larger oil & gas company and therefore better premiums This at $14 billion v $7 billion market caps is now very unlikely. 

From the TradersCommunity Research Desk

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