Concho Resources to use debt, equity to buy Marbob for $1.65 billion

By Jennifer Lanning Drey

Portland, Ore., July 20 - Concho Resources Inc. will use a combination of debt and equity to finance the acquisition of all of the oil and gas assets of Marbob Energy Corp. for $1.65 billion, Concho announced Tuesday.

The planned transaction represents Concho's "largest and most strategic acquisition" to date, Timothy Leach, its chief executive officer, said during a conference call held to discuss the acquisition.

The total consideration paid to Marbob at closing will consist of $1.45 billion of cash, $50 million of Concho common stock and a $150 million 8% senior unsecured note issued to Marbob due in 2018.

Concho said it also received underwritten commitments from affiliates of JPMorgan Chase Bank NA and Bank of America to expand its existing revolving credit facility to $2.0 billion from $1.2 billion in connection with the acquisition.

"They've committed to an upsizing of our existing facility that we will then syndicate out between now and closing," Leach explained during the question-and-answer portion of the call.

In addition to the securities issued to Marbob, Concho has entered into an agreement to sell 6.6 million shares of common stock for $300 million in a private placement transaction. The private placement is expected to close on the closing date of the Marbob acquisition.

Comfortable with higher debt

At closing, Concho's debt to total book capitalization will be in the high 40% range, which is at the higher end of Concho's comfort zone, Leach said.

However, the company is comfortable with the level of debt due to its confidence in the cash flow from its properties and the fact that its debt is less than 2 times EBTIDA, he said.

In addition, Concho has properties it believes are not core to operations and which may be sold to reduce leverage, he said.

The CEO also noted that a portion of the properties included in the acquisition are subject to preferential rights to purchase, which could affect the purchase price.

"While we have no reason to believe this pref right will be exercised, it has the potential to reduce the purchase price and therefore the leverage," he said.

Leach also said during the call that Concho has talked to the ratings agencies, and he doesn't expect any major changes in the ratings, although "there's still work being done."

Increased New Mexico acreage

Marbob is an Artesia, N.M.-based privately held exploration and production company with substantially all of its operations located in the Permian Basin of southeast New Mexico. Marbob has a large acreage position contiguous to Concho's core Yeso play on the New Mexico shelf and a significant acreage position in the emerging Bone Spring play in New Mexico.

"This acquisition comes right out of our play book. It's a private company with assets that we've targeted for several years," Leach said.

After closing, Concho plans to increase the activity level and rig count on the acquired properties, which it said could result in significant production growth over the next several years.

"We will continue to be a company that can invest and reinvest large amounts of cash flow and grow at industry-leading rates while spending within cash flow with a much larger inventory of identified projects," Leach said.

The transaction is expected to close on or before Nov. 30.

Concho is a Midland, Texas-based oil and natural gas company.

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