Coterra Energy (CTRA) - The merger with Devon Energy (DVN)

On May 7th, Devon Energy and Coterra Energy completed a merger. Clients with shares of Coterra Energy (CTRA) will receive 0.7 shares of the combined entity trading under Devon Energy (DVN) for each share they had in CTRA, while receiving cash for any partial shares. It typically takes the custodian a couple of days to accurately reflect the updated position in client accounts. To provide context, this company is a shale oil and gas producer. Our view is that the merger is beneficial to shareholders for two reasons:

1. Operational Efficiency – The two companies both have significant acreage in the Anardarko Basin (Oklahoma) and the Delaware Basin (West Texas). Combining the footprints allows for more efficient and more profitable oil and gas production. They can also share learnings to improve their processes.

2. Cost Benefits – The combined entity can shed costs as they eliminate redundancy.

Altogether, they believe the merger will enhance pre-tax profits by at least $1B per year by 2027.

Operational Efficiency

Source: Devon Energy and Coterra Energy

The combined entity should benefit substantially from operational efficiency here. Piecing together adjacent acreage allows the company to better plan how they develop the resource, drilling longer laterals and producing more crude and natural gas for each dollar of investment.

Cost Benefits

The company expects to realize about $300M per year in reduced corporate costs. This will include the elimination of redundancies as well as an improved credit profile. A larger, more profitable, and better diversified company should be able to refinance debt at a lower interest rate.

Bottom Line

Shareholders should benefit from the combination of Coterra and Devon, as the entity should be more profitable together. In fact, Devon announced a capital return plan on 05/08 that includes a 33% increase in the quarterly dividend as well as an $8B share buyback plan.

Risks

While the merger of shale oil and gas companies is typically straightforward, there are always risks that friction is created in the combination of two entities. Cultures can clash and destroy value. While the risk was already present, oil and gas companies are subject to the whims of commodity prices and changes in regulation.

In Summary

We believe the potential rewards outweigh the risks in combining these businesses. Please reach out to us with any questions. This article represents our thoughts at the time of publication, and we may not update it as our analysis changes. Do your own due diligence and discuss any investment with your financial advisor prior to taking any action.

To learn more about our portfolios and approach, please reach out to us or visit www.auroramgt.com/

Invest Curiously,

Austin

Austin Crites, CFA

Chief Investment Officer

Aurora Asset Management/Aurora Financial Strategies

Austin Crites is the Chief Investment Officer of Aurora Asset Management, an Indianapolis-based subsidiary of Aurora Financial Strategies which is located in Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. Registration with the United States Securities and Exchange Commission does not imply that BCGM or any of its principals or employees possesses a particular levelof skill or training in the investment advisory business or any other business. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.