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The risk/reward balance here gets very interesting.
Coterra Energy, the $20 billion publicly traded exploration & production (E&P) operator, announced two separate acquisition agreements in the Permian totaling $3.95 billion.
The deal “consist[s] of $2.95 billion of cash and $1.0 billion of Coterra common stock.”
Importantly, “[t]he cash portion of the consideration is expected to be funded through a combination of cash on hand and borrowings.”
Today in particular, debt is problematic for oil & gas operators.
The big motivation for consolidation is that uncertainty is growing around for the long-term demand for oil & gas.
How long will demand increase? Once it tips over, how rapidly will it decline?
Operators are competing to become the biggest and strongest, so they can argue to investors that no matter how oil & gas markets shake out, they’ll be the last ones standing.
Taking on more debt introduces more fragility.
It’s not surprising that the last quote from Coterra CEO Tom Jorden at the top of the press release is this one:
“Importantly, we are maintaining an industry-leading balance sheet.”
To put the $2.95 billion cash outlay in context, Coterra reported $843 million in cash on hand as of the end of September.
It also reported $2.1 billion in long-term debt.
So even if Coterra uses every dollar of cash it had on hand at the end of 3Q, it would still have to double its long-term debt to make this deal happen.
I’ll do another post soon comparing the debt burdens of different E&Ps, to help us understand how leverage varies across this sector.
Regardless, doubling your debt load to take on new assets definitely introduces risk that complements the widely understood reward of consolidation.
Like all deals of this size, this will be an interesting one to follow.
Source: Jeff Krimmel on LinkedIn – ENB Recommends following Jeff
The post Coterra is spending $4 billion to consolidate in the Permian. appeared first on Energy News Beat.
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