Devon Energy, WPX Explore $6B Merger: WSJ

Devon Energy Corp DVN and WPX Energy Inc WPX are in talks for a merger that could be closed sometime this week, according to the Wall Street Journal.

What Happened: The terms of the merger aren't yet public, but the newly created entity’s current market valuation could be approximately $6 billion, to the Journal reported Saturday.

The COVID-19 outbreak and lockdown measures have significantly impacted shale investors. On a year-to-date basis, Devon shares have tanked 65%, whereas WPX shares have fallen more than 67%, as earlier noted by the Journal.

KeyBanc Capital Markets analyst Leo Mariani suggested that the merger makes strategic sense, as reported by Bloomberg. Both the companies have drill sites at close proximity in the Delaware Permian basin — a drill site ranked as one of the lowest break-even costs in the country. Mariani added that since Devon has a better financial position in comparison to WPX, the combined entity will have a better chance at surviving "the current oil price downturn.” 

Why Does It Matter: The pandemic outbreak and lockdown measures had a significant impact on oil prices and U.S. shale oil companies are unable to produce at a profitable level, according to Bloomberg. Reportedly, shale investors in the U.S. have been calling for an industrywide consolidation and benefit from economies of scale.

With the merger agreement, Devon and WPX could combine to become one of the largest and independent shale producers. Additionally, the newly-incorporated entity would also be able to consolidate operations and gain a cost advantage from synergies.

In July, Chevron Corporation CVX announced its plans to acquire Noble Energy Inc for a $5 billion all-stock transaction. The deal is expected to close in early October.

Price Movement: DVN stock fell 1.56% during Friday’s trading hours to close at $8.82. Whereas WPX closed at $4.44, 0.68% higher than Thursday’s close.