What happened
Shares of Resolute Energy Corp. (NYSE: REN) surged more than 11% by 10:00 a.m. EST on Monday after the Permian Basin-focused driller agreed to sell itself to Cimarex Energy (XEC +0.00%) for $1.6 billion. The deal follows mounting pressure from activist investors to find a buyer.
So what
Cimarex Energy has agreed to acquire fellow Permian Basin oil and gas producer Resolute Energy in a cash-and-stock deal valuing the company at $1.6 billion, which includes the assumption of $710 million in debt. Cimarex is paying $35 per share for Resolute, which is a 14.8% premium to its closing price last Friday.
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For Cimarex, the deal makes strategic sense because the bulk of Resolute's land is adjacent to Cimarex Energy's position in the Permian. That will allow the company to leverage its knowledge of the area to deliver stronger drilling results. The company believes that the combination will be accretive to both earnings and cash flow per share next year. Further, Cimarex estimates that it will generate free cash flow beginning in 2020, which could enable the company to return more money to shareholders above its current dividend.
For Resolute, the deal marks the end of its battle with activist investors. In May, the company hired financial advisors to explore strategic alternatives, including a possible sale, following pressure from activist investors. The pressure has intensified in recent months as additional activist funds bought shares of Resolute to push the company toward a sale. While those investors got their wish, others who bought in on the hopes of profiting alongside these activists likely didn't make much money, since shares of Resolute have lost value over the last six months due to oil price volatility.
Now what
Cimarex Energy's acquisition of Resolute Energy looks like a smart move. The company is using its cash-rich balance sheet to buy a company with acreage right near its land, which should enable it to deliver stronger drilling returns in the region. Meanwhile, the deal sets it up to start returning more cash to investors by 2020. Those factors make an already-compelling oil stock an even more intriguing idea for long-term investors.
