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.