Cabot and Cimarex Ink All-Stock Merger Deal; Shares Fall

Houston-based natural gas company Cabot Oil & Gas Corporation (COG) has agreed to merge with Cimarex Energy Co. (XEC) in an all-stock merger of equals. The enterprise value for the combined entity will be approximately $17 billion. Cimarex shares declined 7.1% on May 24, while shares of Cabot plunged 6.8%.

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The merger will create a diversified energy leader with the combination of two industry-leading operators having top-tier oil and natural gas assets. Notably, the combined company will be headquartered in Houston under a new name.

Per the terms of the deal, shareholders of Cimarex will receive 4.0146 shares of Cabot common stock for each share held. The transaction, which awaits both companies’ shareholders’ approval and certain regulatory approvals, is likely to close in the fourth quarter of this year.

Upon completion of the transaction, existing Cimarex shareholders will own 50.5% of the combined entity, while the remaining portion will be owned by shareholders of Cabot on a fully diluted basis. Furthermore, the deal is expected to generate annual general and administrative cost synergies of $100 million starting within 18 months to two years.

The combined entity is expected to have an annual base dividend of $0.50 per share to be paid quarterly, along with a quarterly variable dividend, with the target of achieving a capital return of a minimum of 50% of quarterly free cash flow. Notably, the first dividend payment is expected in the first quarter of 2022. Moreover, a special dividend of $0.50 per share to all common shareholders of the combined business is also in the pipeline upon closure of the deal. (See Cabot stock analysis on TipRanks)

Cabot CEO Dan O. Dinges said, “The combination of Cabot and Cimarex will create a free cash flow focused, diversified energy company with the scale, inventory and financial strength to thrive across commodity price cycles. The combined business will be overseen by an experienced Board and a management team that is committed to a prudent strategy built on disciplined capital investment, strong free cash flow generation and increasing returns to shareholders.”

Following the deal announcement, Siebert Williams Shank analyst Gabriele Sorbara maintained a Buy rating and a price target of $25 (50.6% upside potential).

According to Sorbara, “the sell-off is the typical ‘sell the deal’ type reaction and we expect the share price to stabilize/recover as the dust settles, given that the proforma Company has a peer leading, double-digit FCF yield of nearly 15.0% in 2022/2023. We maintain our Buy and $25 PT, as we believe the weakness will prove to be a buying opportunity.”

Wall Street analysts are cautiously optimistic on the stock’s outlook. The Moderate Buy consensus rating breaks down into 4 Buy ratings versus 8 Hold ratings. The average analyst price target stands at $20.86 and implies upside potential of 25.7% to current levels.