In a Dec. 16 research report, Raymond James analyst John Freeman reported that WPX Energy Inc.'s (WPX:NYSE) stock price jumped 9% on news of its acquisition of Felix Energy and with good reason, as the transaction is accretive to the hydrocarbon explorer. As such, Raymond James increased its target price on WPX to $17 per share from $15 and reiterated its Strong Buy rating.
Freeman reviewed the transaction specifics, noting that what WPX paid for Felix was below consensus' expectation. The total consideration of $2.5 billion consisted of $900 million in cash and $1.6 billion worth of WPX shares. Through the deal, WPX gains "premier acreage," about 1,500 undeveloped locations over 58,500 net acres in eastern, oilier Winkler, Ward and Loving counties in the Delaware Basin.
"Assuming $30,000 per flowing barrel for the expected production at close [early Q2/20], the transaction price implies a per acreage valuation of about $12,000," the analyst explained. "On a 2020 enterprise value:EBITDA basis, WPX Energy paid about 3.5x, comparing favorably with consensus pre-deal for WPX at about 5x."
While WPX will fund part of the acquisition by issuing about $900 million in senior notes, the transaction ultimately should be leverage neutral due to the expected, resulting boost in revenue.
Freeman also highlighted that WPX Energy's management and Raymond James agree that the transaction immediately increases cash flow per share (CFPS), earnings per share (EPS), free cash flow per share, return on capital employed, and cash margins, assuming a $50 oil price and no operating efficiencies. In reality, ample synergies are expected from the merged companies.
Raymond James expects WPX to generate, in 2020, about $200 million in free cash flow (FCF) assuming a $50 West Texas Intermediate (WTI) oil price, and about $500 million at $60 WTI, on a pro forma basis. "At strip oil pricing, our model has the operator generating about $350 million in FCF!" added Freeman.
With part of the FCF, Freeman pointed out, management plans to initiate a post-closing dividend, aiming for about $0.10 per share on an annual basis to start. It also intends to conduct favorable buybacks and reduce leverage to 1x by year-end 2021.[NLINSERT]
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Disclosures from Raymond James, WPX Energy Inc., December 16, 2019
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