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Oil/Gas E&P to Buy Permian Acreage in 'Immediately Accretive' Deal
Research Report


John Freeman, an analyst with Raymond James, discussed the proposed transaction.

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John Freeman, an analyst with Raymond James, discussed the proposed transaction.

A March 28 Raymond James research report noted that Texas-based Concho Resources Inc. (CXO:NYSE) agreed to acquire RSP Permian Inc. (RSPP:NYSE) for $50.24 per share in an all-stock, "immediately accretive deal," indicated analyst John Freeman.

In doing so, Concho would add about 92,000 (92K) complementary net acres to its existing roughly 640K net acre land package. "Note that Concho is already the largest pure play in the Permian sandbox, and this deal bolsters its position by ~45K/~47K net acres in the Delaware and Midland, respectively," Freeman wrote.

"At a $9.5 billion acquisition price," Freeman explained, Concho would pay an estimated 75K per undeveloped acre, which compares to the $35–40K per acre rate that other companies paid in recent transactions. "This deal yields the highest acreage valuation we have seen in the space," he relayed.

"The rich acreage value" reflected in this acquisition could benefit the stock of other Permian-focused companies, Freeman added. "Today’s deal highlights the recent disconnect between public energy equities and asset valuations, likely boding well for the entire group."

In combining with RSP Permian, Concho would save $60 million in 2018 alone and about $2 billion (present value) overall, it estimated. The analyst added, "The headline acreage price that Concho paid does not take into account the massive synergies it anticipates from the transaction — scale matters!"

Some of those synergies would be the ability to go after even larger projects; cost savings from completion of bigger pads, potentially eight well versus two to three; enhanced scale with respect to infrastructure capabilities, including water and sand delivery systems; and lower present and future corporate overhead costs, noted Freeman. "Operator ability to leverage bigger acreage and infrastructure footprints will be a key differentiator in the sector going forward."

Freeman opined that Concho's proposed transaction likely will stand. "The Concho-RSP Permian deal price appears strong enough to flush out potential competitive bidders in our view, given the healthy valuation on RSP Permian's undeveloped acreage."

Raymond James has a Strong Buy rating on Concho Resources.

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Disclosures from Raymond James, Concho Resources Inc., Mar. 28, 2018


Analyst Compensation: Equity research analysts and associates at Raymond James are compensated on a salary and bonus system. Several factors enter into the compensation determination for an analyst, including i) research quality and overall productivity, including success in rating stocks on an absolute basis and relative to the local exchange composite Index and/or a sector index, ii) recognition from institutional investors, iii) support effectiveness to the institutional and retail sales forces and traders, iv) commissions generated in stocks under coverage that are attributable to the analyst's efforts, v) net revenues of the overall Equity Capital Markets Group, and vi) compensation levels for analysts at competing investment dealers.

The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.

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