Oil-and-gas company ConocoPhillips is buying fracking company Concho Resources in spite of the downturn in the world oil industry. ConocoPhillips said it had an all-stock takeover deal with Concho Resources for $9.7 billion.
Concho Resources mainly operates on the Permian Basin - the heart of the U.S. shale industry. ConocoPhillips said the acquisition should make it one of the largest independent oil-and-gas companies in the country, boosting its daily production to more than 1.5 million barrels.
However, analysts said the acquisition put ConocoPhillips in a precarious position because it will now be much more exposed to the risks that have so far brought down the world oil sector. While it may have acquired the business at a relatively cheaper price, some experts ask - is it cheap enough?
"It is a bit of a contrarian move to double down on oil and gas at a time when it's unpopular in the investment community," energy analysts at investment bank Raymond James said.
If Democrats win the White House and Congress, oil and gas could be targeted by new regulations. Democratic candidate Joe Biden had previously said he intends to stop permits for activities on public lands and waters. This could derail multibillion plans by some of the country's largest oil and gas firms.
ConocoPhillips's acquisition of Concho Resources is its first major takeover since 2005. The amount it is willing to pay represents a slim 15% premium over the company's closing share price Oct. 13, the day the price rose following rumors of the acquisition.
The market valuation of both companies has since dropped by more than 40% since the start of the year amid the global oil price crash caused by the pandemic and the price war between Saudi Arabia and Russia. Given the state of the industry, ConocoPhillips likely believes that this would be the perfect time for acquisitions given the cheap valuations of its competitors. Based on the per-acre pricing in the Permian Basin, the deal values Concho's assets at just $10,700 per acre. This is compared with a previous price of $40,000 per acre in the previous year.
