What happened
Shares of WPX Energy (WPX +0.00%) rallied more than 10% by 2 p.m. EST on Monday. Fueling the energy stock was its plan to acquire privately held Felix Energy as well as initiate a dividend.
So what
WPX Energy sealed a deal to buy Felix Energy from the private equity company that founded it for $2.5 billion in cash and stock. WPX will issue 153 million shares to EnCap Investments, currently valued at $1.6 billion. It will pay an additional $900 million in cash, which it expects to finance through new debt, though it does have $1.5 billion available to it on its credit facility.
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The deal will significantly bolster the company's presence in the Delaware Basin, providing it with 1,500 undrilled locations. Furthermore, it will add 60,000 barrels of oil equivalent production to the company's output, 70% of which is high-margin oil. Because of that, the transaction will increase WPX Energy's earnings, cash flow, and free cash flow per share. Meanwhile, it won't impact the company's leverage metrics.
With the transaction enhancing WPX Energy's ability to generate free cash flow, it will allow the company to initiate a dividend. The driller plans to pay $0.10 per share on an annualized basis, which implies a 0.8% yield at the current stock price. That's around the targeted payout of many of its peers that have also initiated dividends in recent years.
Now what
WPX Energy is bucking a recent trend in the oil patch as its stock is rising after announcing a deal, whereas most of its peers have seen their shares plunge upon unveiling a transaction. That's because it got Felix for a bargain price of just 3.5 times 2020 earnings assuming $50 oil. As a result, it will significantly improve the company's financial metrics, including providing a substantial boost to free cash flow, which allowed it to accelerate its plan to begin paying a dividend.
