Concho Resources, one of Wall Street's favorite oil drillers, recently announced a deal that would make it the biggest player in the nation's hottest region — and investors have been dumping the stock ever since.
The selling has lopped nearly $2.6 billion off the market capitalization of a company valued at $23.4 billion prior to the announcement.
Concho has long stood out among its peers for its ability to fund its capital spending program with cash generated from its business operations. It's a rare feat in the debt-fueled, growth-oriented world of frackers, the class of drillers that specializes in extracting oil and gas from shale rock through a process called hydraulic fracturing.
But the Street has soured on Concho since it announced last week it would buy fellow Permian fracker RSP Permian in a deal worth $9.5 billion. The move, Concho says, "creates the largest crude oil and natural gas producer from unconventional shale in the Permian Basin."
The case illustrates just how wary investors have become about independent drillers seeking growth at the potential expense of shareholder value.
Shares of Concho are down 11 percent since the announcement on March 28. Over the same period, the SPDR S&P Oil & Gas Exploration & Production ETF — an exchange-traded fund that tracks Concho's peer group — is up 3.5 percent.
In a sign of its recent reversal of fortune, Concho's stock price was up 9.7 percent over the last year, while the ETF was down 3.5 percent. Concho posted the best 12-month performance after ConocoPhillips and Hess among drillers in the S&P 500 Energy sector.
Stifel analysts said the investor reaction may simply boil down to "sticker shock and sheer surprise."
The deal pencils out to about $72,000 per acre, a hefty sum even in the Permian Basin, a prolific oil and natural gas-producing region in western Texas and southeastern New Mexico. The relatively low cost of drilling shale rock there sparked a land rush in 2016 as frackers sought out acreage that could help them weather a period of weak oil prices.
Investors were also caught off guard by the nature of the deal, Stifel says. In the past, Concho has negotiated privately to buy non-public companies in deals that immediately add value to its stock.
"In recent years, the playbook has become increasingly more difficult to execute based on the improving quality of CXO's portfolio and the deteriorating quality of remaining private acreage," Stifel said in a research note.
The critical question for Stifel is whether the cost savings that result from combining the two drillers will offset the $1.8 billion premium it paid for RSP Permian. Stifel thinks it can hit its goal of saving $2 billion.
Piper Jaffray's Simmons & Company said investors might be punishing Concho simply because it didn't offer enough specific, transparent guidance on how it plans to achieve that $2 billion in savings.
The energy-focused investment bank says it's fair to say the deal is expensive on a per-acre basis. However, Simmons believes the purchase will ultimately boost cash flow, a critical measure of financial health in the oil patch.
Some critics also argue Concho didn't need the additional inventory. But Simmons is in Concho's corner on that count, too, saying it has earned the benefit of the doubt given its history of prioritizing its best acreage during tough times, as well as the increased scale and cost savings that a combination will create.
"Notably, the investment community has consistently espoused the merits of consolidation within a highly fragmented business in which operators should benefit from increased scale, scope and combined operating synergies," Simmons said.
Keybanc analysts say some investors appear to be questioning whether the sticker price will make it difficult to wring value out of the purchase. In Keybanc's view, the deal will boost the combined company on most measures of value.
In a research note, the Keybanc analysts say they "see a stronger Company emerging that should warrant a continued premium multiple."