Cabot-Cimarex merger puzzles both analysts and investors

David Wethe May 24, 2021
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HOUSTON (Bloomberg) --Shale investors have been demanding more consolidation in the oil patch. But not exactly a deal like this one.

The merger of Cabot Oil & Gas Corp. with Cimarex Energy Co. announced Monday has confounded investors and analysts, leaving them to question the logic behind a tie-up that the companies say will increase diversification. Cimarex is mostly an oil explorer in Texas and Oklahoma, while Cabot is focused on natural gas drilling in the Marcellus shale basin in Appalachia.

Although the two companies are following a path blazed by other shale explorers of late in clinching a deal involving almost no takeover premium, it wasn’t enough to win over investors. Shares of both drillers plunged the most on an intraday basis in more than a year.

Analysts at Citigroup Inc. said the deal -- an all-stock transaction valued at about $7.4 billion -- is an unexpected pairing as it creates geographic diversity, unlike other major industry transactions recently. KeyBanc Capital Markets Inc. downgraded shares of Cimarex because of the lack of a premium and what it views as no clear strategic benefit to investors. Bloomberg Intelligence said a Permian-focused partner would have made far more sense for Cimarex.

“This deal comes as a bit of a surprise and may have a less clear story to tell investors,” Andrew Dittmar, an analyst at Enverus, wrote in a statement. “Some investors may wonder why in-basin opportunities weren’t pursued ahead of a surprising multi-basin deal.”

Deal-making in the shale patch has picked up following a rebound in oil prices from their pandemic-era lows. The number of U.S. exploration and production deals announced or closed this year have more than quadrupled to about $26 billion from the same period a year earlier, Bloomberg data show.

“We don’t really try to guess how people are going to react,” Cimarex Chief Executive Officer Tom Jorden said in a telephone interview. “This is a long-term move, and we will win our critics over.”

By contrast, enthusiasm permeated through markets two weeks ago when Bonanza Creek Energy Inc. and Extraction Oil & Gas Inc. announced an all-stock deal valued at about $1.1 billion that will combine assets in Colorado. The merger -- a low-premium deal -- was favored among shareholders, as it aims to build on the companies’ existing footprint in the area. Shares for Bonanza and Extraction surged as a result.

“I realize this one is a little different than many of the others,” Jorden said. “We’re not terribly focused on the short-term here.”

Debt-laden oil drillers squeezed by back-to-back oil-market busts have faced the grim prospects of bankruptcy or absorption by a stronger rival. Jorden said the deal -- the largest merger in the U.S. shale patch in almost a year -- was not defensive and will allow the companies to go after bigger acquisitions that they couldn’t have otherwise sought on their own, roughly in the $1 billion to $2 billion range.

“This is an offensive move on our part,” Jorden said. “This combined financial powerhouse -- we have great flexibility that neither one of us have individually.”

The newly merged energy producer will be renamed and be based in Houston. Jorden will lead the company as chief executive officer, while Cabot’s current CEO Dan Dinges will remain executive chairman.

The transaction is expected to be completed in the fourth quarter, subject to the approval of shareholders. The deal will give Cabot shareholders about 49.5% of the combined entity, with Cimarex shareholders holding the rest, the companies said Monday in a statement.

Shares of Cabot fell as much as 8.8% on Monday in New York, while Cimarex shares tumbled nearly 11%.

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