Shale Merger Promises Big Payout, Just Not Yet


Being a small fish in the world of gigantic oil-and-gas majors is tough, especially when oil prices remain low. Shale drillers

Devon Energy


DVN 11.11%

and

WPX Energy


WPX 16.44%

are taking matters into their own hands.

The two companies saw their shares rally 12% and 16% by midday, respectively, after announcing an all-stock merger Monday morning. Devon, which had a market value of $3.4 billion before Monday’s market open, is getting roughly 57% of the combined entity that will carry its name, while the $2.5 billion WPX is getting 43%.

The merger will reduce the break-even price for the combined company to $33 a barrel for West Texas Intermediate crude, according to Devon Energy and WPX Energy.



Photo:

nick oxford/Reuters

The combination, which still requires shareholders’ approval, certainly seems like a protective move for both, which have lost more than 60% of their value year to date, even after Monday’s rally. That is a steeper decline than the 50% loss that the broader basket of oil-and-gas exploration companies have seen. Both companies are non-investment-grade issuers and have substantial exposure to unconventional basins, where extraction is costlier but capital expenditures can be turned on and off more rapidly.

There is something for both parties here: For Devon Energy, the merger reduces the company’s exposure to federal lands—cushioning it against potential election risk, according to a report from Scotiabank. For WPX, whose credit rating is two notches lower than Devon, it would help reduce leverage. The merger will reduce the break-even price for the combined company to $33 a barrel for West Texas Intermediate crude, according to the companies. They figure they can cut $575 million worth of costs together by year-end 2021, including through drilling and operating efficiencies.

It’s not only the larger scale that investors seem to be excited about. The combined company has a novel dividend policy, one that Devon has been mulling for some time. It promises to pay out as much as 50% of excess free cash flow in dividends, which would be on top of a fixed dividend of $0.11 per share, Devon’s current rate. The payout is a substantial perk for WPX common stock investors, who haven’t been receiving dividends at all, and could partly explain why its shares are enjoying a larger boost.

Of course, it is hard to imagine a scenario where the dividend is very high in the current oil-price environment. Still, the promise of a juicy dividend—even if in the distant future—seems to be enough to get investors excited, again.

An abundance of fossil fuels combined with advances in technology to harness wind and solar power has sent energy prices crashing around the world. WSJ explains how it all happened at once. Photo illustration: Carlos Waters/WSJ

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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