Entering text into the input field will update the search result below

Concho Resources - Strategic, Yet Rich, RSP Deal

Apr. 02, 2018 11:44 AM ETConcho Resources Inc. (CXO)RSPP5 Comments


  • Concho is willing to pay a big premium to acquire RSP.
  • The adjacent properties make that deal worthwhile from a strategic point of view, yet the premium seems rich as Concho actually sold some of these assets a few years ago.
  • I understand the caution from an investor point of view, as I never was a big fan of the standalone valuation to start with.

Concho Resources (NYSE:CXO) announced a major deal with the acquisition of RSP Permian (RSPP) in a rather large $9.5 billion deal, welcomed by investors of the latter, but not necessarily by shareholders of Concho. This is despite the promise of $2 billion worth of synergies.

The tie-up makes perfect sense from a strategic point of view and does not add much to pro-forma leverage (given that this is an all-stock deal), yet the exchange ratio seems a bit rich in terms of the value attached to RSP. While the deal is large and seems a bit rich in relation to Concho's own valuation, I was never a big fan of the standalone value to begin with. Even based on annualized Q4 adjusted earnings, Concho trades at 40x earnings, while cash flows are lagging as a result of large net capital investments needed to sustain the growth story.

The Deal

Concho has reached an all-stock deal to acquire RSP Permian by offering 0.32 of its own shares in exchange for each share outstanding of RSP. The $9.5 billion deal is comprised of an $8.0 billion stock component, valued at a 29% premium and includes $1.5 billion in net debt of RSP as well. To illustrate how large the deal is for Concho, investors in RSP will combined own 25.5% of the shares of Concho.

Let's focus on the operations. With the deal, Concho will add 92,000 net acres in the Permian, located in close proximity or adjacent to the properties of Concho itself. The acreage contains 5,000 gross drilling locations that currently produce 56,000 barrels of oil equivalent per day and contain 2.2 billion barrels of oil equivalent in terms of its reserves. Concho will grow production from 211,000 to 267,000 barrels of oil equivalent per day following the deal, see Permian acreage jump from 550,000 to

Please subscribe to Value In Corporate Events to obtain premium research on all the latest IPOs, M&A activity, and other corporate events. Reviews of situations will be made upon request!

This article was written by

The Value Investor profile picture
Finding value that gets unlocked in M&A, IPOs and other corporate events
The writer is a long term value investor and M.Sc graduate in Financial Markets with over 10 years experience. Value can be found in both long and short ideas and uses options to enhance the risk-return profile of investment ideas. Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.