What happened
Shares of Whiting Petroleum (WLL +0.00%) tumbled nearly 10% by 10:30 a.m. EDT on Tuesday. Driving down the stock was news that the energy company is pursuing a deal to acquire Abraxas Petroleum.
So what
Reuters reported last night that Whiting Petroleum is in talks to buy Abraxas. According to the news agency's sources, it would be an all-stock deal, though the terms aren't yet known. The transaction would increase Whiting's land position in North Dakota's Bakken shale while also giving it a foothold in the fast-growing Delaware Basin of Texas. The combination would also enable Whiting to spread its costs over a larger production base, which would help improve returns.
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While the deal makes some strategic sense, investors don't like the proposed combination. That's because it would add some operational risk, given that Whiting doesn't have any experience in the Delaware Basin. Furthermore, investors have grown increasingly wary of oil stock mergers, given that acquirers have significantly underperformed the market in recent years. That's why investors have been selling off the shares of oil companies making merger-and-acquisition transactions.
Now what
Investors don't like the idea that Whiting might buy Abraxas, even though they don't know all the details yet. They're clearly taking a "sell first and ask questions later" approach. However, given the struggles of both companies in recent years, investors would likely be better off steering clear of either one no matter what happens with this proposed deal.
