Sep 28, 2020 - Economy

A big shale deal

Illustration of big banks leaving oil companies

Illustration: Sarah Grillo/Axios

The oil-and-gas producers Devon Energy and WPX Energy are merging in a roughly $2.6 billion all-stock transaction that comes as U.S. producers are struggling with depressed prices and demand.

Why it matters: The deal between two companies active in the prolific Permian Basin of Texas and New Mexico will help create economies of scale and improved margins, they said this morning.

  • The move "accelerates Devon’s transition to a business model that prioritizes free cash cow generation over production growth," they said of the combined company, which will retain the Devon name.
  • The merger creates one of the largest shale producers in the country, with current combined production of 277,000 barrels per day.
  • Reuters and the Wall Street Journal reported on the deal over the weekend.

The big picture: Analysts have been predicting that the pandemic, combined with the already challenging economics of shale, could spur new consolidation in the U.S. oil patch.

  • In July, Chevron announced a $5 billion deal to acquire Noble Energy, though that deal wasn't just about shale — it also gave Chevron key natural gas assets in the Mediterranean Sea.

The intrigue: There’s an election angle here too.

  • Bloomberg points out that Devon has a greater share than WPX of holdings on federal lands, and Biden has vowed to curtail development in those areas.
  • “A deal with WPX would ... address Devon’s exposure to federal acreage, according to Gabe Sorbara, an analyst at Siebert Williams Shank & Co. LLC.”
  • They report that “Devon has been fielding analyst questions for months about the potential impact of a Biden presidency.”

Go deeper: Why U.S. oil production won't soar again soon

Go deeper