Cimarex Had Merger Talks With Other Rivals Before Cabot Deal

(Bloomberg) -- Cimarex Energy Co. had merger talks with five other shale rivals before it agreed to be acquired by Cabot Oil & Gas Corp. for $6.7 billion, a disclosure that will likely fuel criticism of the deal's strategic rationale.

Cimarex escalated discussions with one other unnamed company besides Cabot by signing a non-disclosure agreement and exchanging private information, according to a regulatory filing. Talks began in the middle of 2020 with the other potential deal partners, whose operations were primarily in the Permian or Anadarko basins, according to the filing.

“The interactions with the other E&P company party to a non-disclosure agreement occurred in mid-2020 but did not progress to the negotiation of financial or other material terms before cessation,” Cimarex and Cabot said in the joint filing.

The Cimarex-Cabot tie-up has become one of the most contentious U.S. oil and gas mergers of the past year. It surprised industry analysts including those at Bloomberg Intelligence, who said it would have made more sense for Cimarex to combine with another oil producer in the Permian Basin of West Texas and New Mexico, in line with recent demands from energy investors for shale operators to consolidate in order to cut costs and achieve scale. Cabot is a gas producer operating in Pennsylvania.

While there have been several well-received shale mergers in 2021 -- for example, the combination of Colorado drillers Bonanza Creek Energy Inc. and Extraction Oil & Gas Inc. that was announced in May -- Cimarex appeared to disappoint some investors by choosing to seek geographic and commodity diversity instead.

Shares of each company fell 7% the day the deal was announced. Cimarex Chief Executive Officer Tom Jorden said at the time the transaction, the largest in the U.S. shale patch in almost a year, wasn't defensive and would allow the companies to go after further acquisitions in the $1 billion to $2 billion range.

“From the time that Cimarex began discussions with Cabot until the merger agreement was signed, Cimarex held 11 board meetings at which the potential strategic business combination with Cabot was discussed,” according to the filing.

In recent weeks, Jorden has continued to defend the transaction during investor presentations while acknowledging the criticism that has come his way.

“We kind of broke from the herd; this doesn't fit the model, and we understood that,” Jorden said June 22 in a presentation delivered to the JPMorgan Energy, Power & Renewables conference. “We wrestled with a lot of things in our boardroom over this.”

Deal-making in the U.S. shale patch has picked up in the first half of the year following a rebound in oil prices from their pandemic lows. Concerns over bankruptcies have given way to optimism over earnings and speculation that even more consolidation will follow. Shale companies' collective free cash flow is seen rising to a record $30 billion, according to Bloomberg Intelligence.

Shares of Cimarex, which trades under the “XEC” ticker symbol, rose 0.6% to $70.37 at 10:47 a.m. in New York. When compared with the exchange rate in the Cabot offer, Cimarex is trading at a premium, “which indicates that the market is expecting that a better offer for XEC is likely at this point,” Leo Mariani, an analyst at KeyBanc Capital Markets Inc., wrote Wednesday in a note to investors.