Devon Energy and WPX have announced a merger. The energy companies are going through a demand slowdown. Even before the coronavirus pandemic started, there was less demand. The COVID-19 pandemic has lowered the demand even more. Energy companies are taking drastic steps to survive.
Many companies have slashed their dividends and other discretionary expenses. Other companies are exploring mergers to survive the downturn. Consolidation in the oil and gas industry is picking up the pace. The merger comes on the heels of Chevron acquiring Noble Energy in July.
What's the Devon Energy and WPX news?
On Sept. 28, Devon Energy and WPX announced that they are combining in an all-stock deal. The combined entity will be known as Devon Energy. Devon Energy and WPX’s market value is nearly $3.4 billion and $2.5 billion, respectively. The merger move is being termed as the "mergers of equals."
The merged company will likely benefit from the enlarged scale, higher margins, and improved free cash flow. Under the terms of the agreement, WPX shareholders will receive 0.5165 shares of Devon common stock for each WPX share held. According to the exchange ratio and the closing prices of the two companies on Sept. 25, the combined entity should have an enterprise value of about $12 billion.
David Hager, Devon Energy’s president and CEO, commented on the deal and said, “This merger is a transformational event for Devon and WPX as we unite our complementary assets, operating capabilities and proven management teams to maximize our business in today’s environment, while positioning our combined company to create value for years to come.”
Devon Energy's layoffs amid the COVID-19 pandemic
One of the rationales behind the Devon Energy-WXP merger is the cost synergies. Due to the coronavirus-induced slowdown, many companies had to lay off employees. Devon Energy had to resort to layoffs in early September to weather the downturn. Due to the uncertain future in the energy sector, Devon Energy reduced its workforce and said, “We have made the difficult decision to reduce the size of our workforce at this time. All impacted employees will receive separation packages including severance pay.”
What is WPX and Devon Energy’s stock price today?
At 8:40 a.m. ET in pre-market trading on Sept. 28, WPX Energy stock was trading higher by 12 percent, while Devon Energy stock was up by 12.3 percent. The merger will create one of the largest independent U.S. shale producers. Also, both companies' investors will likely benefit from the potential synergies accruing from the merger, which would boost the stocks.
Should you buy Devon Energy stock?
So, should investors buy Devon Energy stock? The question focuses on whether or not the merger will be successful. The merger's start seems to be solid. Shale companies have been called out by shareholders to consolidate after years of poor returns. There are synergies to be had from the merger. Both of the companies have operations near each other in the Delaware Basin.
The merger will allow Devon Energy to operate in the Permian Basin with a larger footprint at lower costs. Also, the merger will give the company access to the North Dakota region. Overall, the transaction looks accretive. If the merger is executed correctly, it could make Devon Energy an attractive energy play.