Cabot Oil & Gas (CTRA -0.63%) has agreed to unite with Cimarex Energy (XEC) in an all-stock merger of equals. The transaction values the combined oil and gas companies at $17 billion.
The transformational merger will create a diversified energy company focused on generating free cash flow. It will combine Cabot's top-tier natural gas assets in the Marcellus Shale with Cimarex Energy's oil-rich positions in the Permian and Anadarko basins.
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The companies estimate that the combination will save $100 million of annual general and administrative costs within two years of closing the transaction. That will further reduce the combined company's cost structure, positioning it to generate $4.7 billion of free cash flow from 2022 to 2024, assuming oil averages $55 a barrel and a natural gas price of $2.75 per MMBtu.
That enhanced free cash flow profile will enable the new company to return more cash to shareholders. The combined entity plans to pay a sustainable base dividend that should grow over time, a variable dividend, and a special dividend. It's targeting an initial annual base dividend of $0.50 per share that it will pay quarterly. It aims to supplement that payout with a quarterly variable dividend targeting to return at least 50% of its quarterly cash flow, with the first payment expected in the first quarter of 2022. Finally, the company intends on paying a $0.50 per share special dividend upon closing the transaction, which it hopes will occur in the fourth quarter of this year.
The companies believe their combination will create a top-tier oil and gas company with a more resilient platform and greater financial strength. That should allow them to deliver sustainable returns to shareholders throughout the commodity price cycle.
