Good morning, and welcome to the Cabot Oil & Gas and Cimarex Energy to Combine in All-Stock Merger of Equals conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Megan Hays, Vice President of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. Thank you for joining our conference call to discuss the combination of Cabot and Cimarex, which we announced earlier this morning. Joining me today are Dan Dinges, Chairman, President, and CEO of Cabot, and Tom Jorden, Chairman, President, and CEO of Cimarex. You'll find a supporting slide presentation in the investors section of both companies' websites under the Events and Presentations page. We'll walk through that slide presentation this morning. After the prepared remarks, as the operator indicated, we'll open it up for questions and answers. I would like to remind everyone that this call will include forward-looking statements. Any forward-looking statements that we make today are based on assumptions as of this date and time. We undertake no obligation to update these statements as a result of new information or future events.
I would refer you to our SEC filings for a full review of all of those risks. With that said, I'm pleased to turn the call over to Dan Dinges, Chairman, President, and CEO of Cabot.
Thanks, Megan, and thank you everyone for joining us today. This is truly an exciting day for both Cabot and Cimarex Energy. I'm going to start off by going over the transaction and then turning the call over to Tom, who will provide more details on this highly compelling strategic and financially beneficial transaction for both companies. With that, let me start by noting that today marks an important milestone for Cabot and Cimarex and the start of the next chapter in our histories. Over the past few years, both companies have evolved as our industry has also evolved. We have successfully executed our operating plan to drive sustainable free cash flow and shareholder value creation. In doing so, we have established a track record of operational excellence, taking important steps across our footprint to maximize efficiency and production.
While we have made important progress, we have long understood the long-term benefits of expanding geographically and beyond the Marcellus, and adding more scale to our operations. This transaction does that. It will accelerate our strategy and create an industry-leading operator with the geographic and commodity diversity, scale, financial strength to thrive in today's market and beyond across the commodity price cycles. With the addition of Cimarex oil assets in the Permian and Anadarko to our natural gas assets in Marcellus, we will have scale and strong positions in the premier oil and natural gas basins in the U.S. As a combined business, we intend to execute a prudent strategy built on disciplined capital investment, strong free cash flow generation, and increasing returns to shareholders. We expect to have strong financial foundation, which will underpin everything we do.
The combined business is expected to have one of the strongest balance sheets in our industry. Importantly, ensuring the health and safety of our employees as well as protecting the environment and the communities in which we live and operate will remain a top priority. At Cabot and Cimarex, we have made significant advances in our environmental, social, governance practices, and disclosures. As a combined business, we will build on our ESG and sustainability commitments and work to advance the benefits of cleaner energy. In short, this transaction builds on and accelerates the strategy we have been executing. We will be well positioned to deliver long-term value creation for our shareholders and other stakeholders. Let me now quickly go over the transaction terms. Under the terms of our definitive merger agreement, Cimarex shareholders will receive 4.0146 shares of Cabot common stock for each share of Cimarex common stock owned.
The exchange ratio, together with closing price for Cabot and Cimarex on March 21st, 2021, reflects an enterprise value for the combined businesses of approximately $17 billion. Upon completion of the transaction, Cabot shareholders will own approximately 49.5%, and Cimarex shareholders will own approximately 50.5% on a fully diluted basis. The companies are targeting an annual general administrative cost synergies of approximately $100 million, beginning within 18 months to two years following the closing. The combined business, which will operate under a new name, plans to be headquartered in Houston, and we plan to maintain Cabot's regional presence in both Pennsylvania regional office and field offices in both Pittsburgh and Montrose and GDF, along with Tulsa and Midland.
In terms of leadership, among closing, I have the privilege of serving as Executive Chairman. Tom Jorden will lead the company as the Chief Executive Officer and serve on the Board of Directors. Scott Schroeder.
Cabot's current chief financial officer will serve as CFO of the combined business. The remainder of the company's leadership team will include executives from both Cabot and Cimarex. The board of directors of the company will be composed of five directors from the current Cabot board, including me, as well as five directors from the current Cimarex board, including Tom. The transaction is expected to close in the fourth quarter of 2021, subject to regulatory clearance, the approval of Cabot and Cimarex common shareholders, and the satisfaction of other customary closing conditions. Consistent with our shared focus on delivering returns to shareholders, both Cabot and Cimarex intend to continue paying base quarterly cash dividends through closing. Before I turn the call over to Tom, I'd like to emphasize that we strongly believe this is the right transaction for Cabot and Cimarex.
Cimarex and Cabot are excellent partners with a highly complementary business and similar safety-first culture. The stock-for-stock culture of this transaction will allow shareholders of both companies to benefit from the powerful upside potential of the combined business, which will be well-positioned to deliver enhanced capital returns across market conditions. Finally, I'd like to thank Cabot employees for their hard work and dedication to working safely each and every day. It's their resilience over the last years that has enabled us to reach this transaction. With that, Tom, I'd like to turn it over to you.
Thanks, Dan, and good morning, everyone. I share Dan's excitement about the transaction we've announced this morning, but let me start by walking you through the rationale of this merger. In fact, I want to start with my conclusion. We're in a cyclic business, and ultimately, there are only three things that matter over the long run: one, the quality of an organization, two, the quality of your assets, and three, the quality of your balance sheet. Not only does this transaction check all three boxes, but the combined company becomes best in class in all three. It is fit for purpose in the Shale 3.0 world. Building an even more resilient platform with greater financial strength will deliver sustainable performance through the cycles. We view and always have commodity, geography, and asset diversification as competitive advantages that will drive more resilient free cash flow and long-term value creation.
This view is based on our experience and has taught us that diversity pays in the long run. The combination of Cimarex and Cabot results in a powerful asset mix with exposure to oil, gas, and natural gas liquids. Our asset mix and low-cost structure are core competitive advantages that will dampen the impact of price swings on any single commodity. I also look forward to bringing our talented teams together to unlock the tremendous potential of this compelling organization. We have top-tier organizations, and we'll be forming a new company that's stronger than either singly. We are aligned in our commitment to ESG and sustainability and look forward to bringing our talented teams together to unlock the tremendous potential of this combination. There are key points to remember. First, we have a high-quality, diversified operating platform. We will be a free cash flow leader.
We'll have financial strength second to none, and we bring an experienced leadership team and an outstanding organization. This company isn't built for the next quarter, it's built for the next decade. I'm going to start by walking through the five key attributes that make this deal compelling. First, combining top-tier assets will enhance our scale, diversity, and capital optionality. Cabot operates in the most productive areas of the best U.S. gas basin. Similarly, Cimarex assets are in the most productive areas in the best U.S. oil basins. Together, we will have best-in-class assets. With Cabot's approximately 173,000 net acres in the Marcellus Shale and Cimarex's approximately 560,000 net acres in the Permian and Anadarko basins, the combined business will have a multi-decade inventory of high-return development locations in the premier oil and natural gas basins in the United States.
High-quality, diversified assets will protect us through the cycles and support long-term value creation. Second, attractive and sustainable free cash flow profile. Our industry requires better capitalized companies, more capital discipline, less leverage and more awareness of market signals for growth. The combination of our two companies increases our size and scale, provides one of the industry's best balance sheets, and a durable cash flow profile that provides capital flexibility. We have clearly defined priorities as how the combined business will allocate capital. Accelerating return of capital strategy, returning cash to shareholders, sustainable base dividends, supplemental dividends, and share repurchases. Investing in our business, disciplined CapEx, responsive reinvestment to market environment, value-enhancing opportunities. Finally, maintaining financial strength.
All of this provides us with the flexibility and optionality to survive and thrive in a cyclic world. The combined company's diversified portfolio and low cost structure underpin the pro forma free cash flow outlook. Equally important to the free cash flow outlook is our approach to investing in assets. Both companies execute returns driven capital programs. We also commit to capital discipline and prudently investing with awareness for global supply and demand and pricing for the commodities we produce. Any look at the history of these two companies should leave little doubt that go forward, the combined company will have capital discipline. This approach is expected to generate approximately $4.7 billion in free cash flow from 2022 to 2024, which represents more than a third of our combined market capitalization. This free cash flow outlook assumed $55 WTI oil prices and $2.75 Henry Hub gas prices.
From the scenarios provided in our investor material, you can see the resiliency of the free cash flow profile across a range of commodity prices. That is the compelling part of this transaction. As you see in our material, as you look at various commodity profiles, it takes the combined company off a cash flow rollercoaster and provides us with the most stable, repeatable cash flow stream in our business, and that is the demand of Shale 3.0. Third important key attributes of this transaction is that we expect it to accelerate capital returns. We will be well positioned to deliver enhanced capital returns to shareholders across a full range of market conditions through a multifaceted program offering sustainable base dividend that is positioned to grow over time and a variable dividend and a special dividend.
Our new business is expected to have an annual base dividend of $0.50 per share, representing a forward dividend yield of 2.8%, which will be paid quarterly with plans to supplement the base dividend with a quarterly variable dividend to achieve a target capital return of 50% of quarterly free cash flow, with the first payment expected in the first quarter of 2022. We think the strength of that initial ordinary dividend communicates our confidence in the core business model and rationale for the combination. The combined business plans to declare and pay that $0.50 per share special dividend to all common shareholders of the combined business promptly after the closing of the transaction. As I've said, our free cash flow will be sustainable and predictable due to the free cash flow durability and long runway of high quality drilling locations.
We've provided the formula for calculating our approach to the variable dividend in the appendix of the investor presentation. This transaction builds on the track record of returning capital to shareholders. Cabot and Cimarex have returned a combined $2.3 billion to shareholders since 2016 through dividends and share repurchases. Fourth, following the closing of our company, we will have a strong balance sheet, the strongest in our business. Strong capital structure with minimal near term debt maturities and a low cost of capital. We anticipate to have pro forma liquidity of $2.2 billion upon closing and will maintain a net debt to EBITDA ratio of less than 1.0. Lastly, our company will be differentiated by our commitment to ESG and sustainability. Cabot and Cimarex share commitments to environmental stewardship, sustainability, and strong corporate governance.
The combined business will build on the two companies' ongoing ESG efforts by, among other things, continuing to link executive compensation to ESG performance and maintaining strong board oversight of ESG risks and programs. The combined business is expected to report sustainability metrics pursuant to SASB and TCFD standards. Through all of these benefits, we create a stronger, more resilient energy company. We couldn't have gotten here without hard work and dedication of our employees. We're excited for the future and the opportunities it will bring. We are very much looking forward to leading the combined team. While the strategic rationale is clear, a key component of this combination is the opportunity to combine with a like-minded party who shares our goals and commitments, a key pillar to form a technically driven leading company.
Similar strategies exist in both legacy companies based on disciplined capital investment, strong cash flow generation, and increasing return to shareholders. We also have a shared commitment to being good corporate citizens. In closing, we are confident that shareholders will understand that we are combining two strong companies to form a technically driven, dynamic, and diversified energy company that is uniquely positioned to succeed for the long term. We will remain opportunistic, and this transaction not only helps with near term goals, but also prevents meaningful opportunities going forward. After a year in which we've all experienced rollercoaster change and volatility, we're building an even more resilient platform with greater financial strength to deliver sustainable through cycle returns on and of capital. I want to emphasize through cycle.
When you look at those commodity price iterations, the rationale for this transaction becomes rock solid, and it's clear that this new company is fit for purpose for the demands of Shale 3.0. Thank you for joining us. We're happy to take your questions. Operator, please open the line for questions.
We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Nitin Kumar with Wells Fargo. Please go ahead.
Hi. Good morning, Tom Jorden, Dan Dinges, congratulations on the deal. Tom Jorden, I'd say your commitment to the variable dividend probably qualifies you for an upgrade to a Shale 3.0 membership to Shale 3.0 +. Maybe this is a quibble, but looking at your variable dividend formula, the base dividend falls below the free cash flow and within the target payout. Am I just reading too much into it, or was this a bit more of a conservative stance by the combined company?
Well, what we've announced, Nitin, is 50% of our free cash payout, including our sustainable ordinary dividend and our variable dividend. Now, that's a target, and that's a launch position. Like any new thing, we need to get our feet on the ground, and we'll be providing updates as the company progresses.
Got it. Okay. I guess my follow-up, you highlighted the inventory depth, but how should we think about capital allocation across the combined company? Obviously, Cabot has strong assets in the Marcellus. You have some gas opportunities in the Anadarko and oil. Could you give us an insight into how you're thinking about capital allocation as a combined company?
Well, my answer will not surprise you. I think about capital allocation in terms of return on investment through the commodity cycles. The thing that excites us about this transaction is the quality of Cabot's inventory matches the quality of Cimarex's inventory in terms of investment returns over the next decade. We have studied this hard. We have taken this apart with all of the science and rigor that Cimarex brings to anything we do. This company is well-positioned through any commodity environment, as we have modeled, to generate free cash flow, to generate top-tier returns on investments, and to have financial performance second to none. It takes us off of the commodity roller coaster by giving the combined company unbelievable optionality, and that's why we love this combination.
Got it. Thank you, guys.
The next question comes from Arun Jayaram with JP Morgan. Please go ahead.
Yeah, good morning. Tom, my first question is wondering if you could give the market maybe an update on any technical work you've done on Cabot's asset. Any thoughts on the inventory depth, tier 1 inventory that you see for Cabot, I'm thinking about Slide 16, but maybe some more details on that.
Yeah, Arun. We've taken this apart. Obviously, I will say I'm really looking forward to putting our two technical teams together. This is a combination of top-tier assets, best-in-class assets anywhere in the United States. We love the Lower Marcellus. We think there is a tremendous opportunity yet in the Lower Marcellus. I think the Upper Marcellus, quite frankly, is underappreciated. I think the Upper Marcellus, if you really tear this apart, is going to surprise to the upside. We're going to prove that over time. I really do look forward to getting two fantastic technical teams together and coming up with development plans that we see competing with anything in our inventory.
Okay, great. Just a quick question maybe for Mark is on cash taxes. I know that Cabot has shifting to be a more meaningful cash taxpayer over time. Any thoughts on what this will do to the cash tax rates on a combined basis?
Excuse me. Good morning, Arun. Cimarex does have $2 billion of NOLs. The combined company will have access to utilizing those. There are 382 limitations, with the built-in gains, we expect to utilize those in a short order with the built-in gain benefit to those. The combined entity will have, again, the benefit of those NOLs, and we'll be utilizing those. We'll be providing more clarity as we get to closing and what the effective tax rate is on the combined company.
Okay, fair enough. Thanks, gents.
The next question comes from Neil Mehta with Goldman Sachs. Please go ahead.
Good morning, team. Tom, this is a question for you. On our estimates and consensus estimates, Cabot trades at a significant premium to Cimarex on a variety of metrics. How'd you get comfortable with doing a deal at a relatively low premium or no premium here?
Well, this deal is not about the next quarter, it's about the next decade. When you look at the quality of Cabot's PDP, when you look at the quality of Cabot's inventory, when you look at the balance sheet, we think this is a fantastic transaction for the Cimarex shareholder. This deal is about the value that the combined company creates. Looking at it as just a one plus one is the wrong way to look at this deal. We are excited to build something that will be extremely value-enhancing for the Cimarex shareholder.
The follow-up is just, can you provide a little bit more background on how the transaction came together? Was it a fully marketed deal from your perspective, Tom Jorden, or was this something that was negotiated on a bilateral basis?
I've been very clear in my statement on this. I've said over that the only thing we would consider is building a better company. We weren't interested in getting bigger, we were interested in building a better company. I don't think there's anybody that can look at this and look at what this company will do over the commodity cycles, look at the team that we bring, look at the team and the performance of Cabot and their manufacturing precision and repeatability. The combined entity is a better company than either one individually, and that's why we did this deal.
Yep. Thanks, Tom.
The next question comes from Josh Silverstein with Wolfe Research. Please go ahead.
Yeah, thanks. Good morning, guys. Tom, I wanted to just go over the free cash flow accretion from this deal, and wanted to hear how accretive you think it is to the free cash flow per share outlook. It doesn't mention any accretion in the slide deck here, but it seems like you guys would've been able to go and start your variable dividend on your own. Just wanted to go through again, like how enhancing this transaction may be.
Well, Josh, we're going to be providing a lot of details when we roll this out, but the hesitation from our side, from Cimarex on the variable dividend is similar to the way you hear a lot of companies talk about their ordinary dividend. You hear a lot of companies talk about an ordinary dividend that's capped at 10% of their cash flow. The reason that that's generally a conversation item is because people are conservative about the swings in their cash flow. When we looked at it, because this combined entity is so rock solid through the oscillation of the various commodities, we feel 100% comfortable coming out of the chute with a more aggressive ordinary dividend than any of our peers. That's the story. This is going to be extremely valuable and build long-term value for both parties.
The Cimarex and the Cabot shareholder benefits in this transaction. This ticks all the boxes, as I said at the beginning.
Got it.
Best in class assets, best in class organization, and best in class balance sheet.
Got you. Just as far as potentially looking at another transaction, there's plenty of other post-bankruptcy E&Ps that offer some really high free cash flow, low balance sheet profiles could have diversified your asset base as well. Why this one versus, say, diversifying into the Bakken or a more diversified producer?
Well, the story isn't written yet, is it? This gives us a tremendous platform. We'll be on offense. We didn't do this deal to sit around and just count what we have. We're going to put our organization to work, and this is going to be a company on the move.
Got it. Thanks, guys.
The next question comes from Doug Leggate with Bank of America. Please go ahead.
Thanks. Good morning, guys. I've got two questions I wanted to ask. I guess the pipeline question's already been asked, but I want to ask you both a kind of frank question here. Dan, you're 67, Tom, you're 63. Looks like you're moving to Houston. I just want to ask if, was this the best deal for both companies? What I mean is there's no operational overlap. Synergies from a G&A standpoint, fair enough, but your balance sheets don't get you a lower cost of capital. I'm just trying to understand if you've put both yourselves in play here or if you actually think this is the final part of the story or if there's another leg to this, because clearly there's benefits for both companies.
Thank you, Doug. I appreciate the question. Tom and I have been visiting for an extensive period of time on this. We are entirely comfortable that this is the right combination for both of us. When you look at the metrics and deliverables that Tom has been able to outline in his opening remarks, I will regurgitate some of those with the sustainable free cash flow that we have. You look at the dividend policy we're going to be able to do with that sustainable free cash flow through the commodity cycle. Look at the platform built with the scale and the diversity that we have.
No challenge on the quality of the natural gas assets and return profile of our Marcellus assets. Certainly no question on the return profile of Cimarex assets. When you look on a combined basis, you look at the margin provided, the efficiency of both organizations, and you look at the optionality that this platform brings, it's hard to shoot a lot of holes when you look at what the combination is as two companies coming together.
Doug, I want to just chime in here. I want to disagree with your core premise. I am not too young to be leading this combined entity. The way I think about it is you need to cover up a lot of the noise. I'm a geophysicist. I have a career where I've learned to separate the signal from the noise. You need to cover up the fact of geography and asset mix. Look at the combined financial performance of this company. When you look at that, it's hard not to just say wow. Cimarex brings a very deep bench to this enterprise. I think you're going to find some very young people on our executive team. This company is built for the future. Gas, oil, Pennsylvania, Texas, that's noise.
The signal in this is they're two of the best assets in our business, the best investment returns, and this thing, when you look at the financial performance, the cycles, you just say, "Wow, this is really a premier company." It's for the next decade, and we intend to deliver.
My follow-up, guys, is really I want to come back to the NOL issue. I want to preface this because I listened to the questions from some of the other analysts, and they talk about the dividend, they talk about the multiple. I think as you all know, our view is that the multiple is the output. If you look at the DCF of your free cash flow profiles for both companies, we had you both kind of trading within sight of fair value, to be perfectly frank. If I look at the uplift from the synergies, on our numbers, it's probably about $1 per share, which really begs the question, what else is there that's going to come from that? You haven't given any details on the synergy. I wonder if you could just walk us through how you came to that number.
Slide deck's kind of skinny, so it looks like maybe it was cobbled together fairly quickly. I just wonder if you could walk us through what uplift you can think in the synergies. I want to get back specifically to that issue of cash taxes, because with someone else's NOL and both you guys generating free cash flow, you could make a case that the NOL opportunity here has been missed.
Doug, it's Mark. First starting on the synergies, the companies have worked together to identify some overlapping administrative groups that we believe will be able to, in a combined company, be more efficient with a lower staff level for mostly administrative groups and other executives will be departing and things of that nature. In combined basis, on a G&A basis, it's just combining the companies, moving the headquarters to Houston, that will result in that $100 million of G&A savings we're forecasting. The NOLs, Doug, as I mentioned to Arun, we do have $2 billion of NOLs at Cimarex. We've evaluated if there's any limitations on those from a 382, with the 382 limitations and built-in gains, they will be fully utilized in a reasonable amount of time. The combined entity will benefit from those $2 billion of Cimarex NOLs.
Doug, I will also add to that. There will be other synergies we'll identify along the way. Cabot and Cimarex are two fantastic operating companies. When we put our operating teams together, we're going to learn from one another, and I am really looking forward to getting better across our combined platform. We're going to have to do a little work to identify those, but I'm highly confident given the quality of our two teams and the quality of our track record, that we're going to learn a lot from one another and find additional synergies.
Thanks for answering the questions, Tom. I think you did a Reading Monday on me there, but I appreciate it. Thank you.
The next question comes from Leo Mariani with KeyBanc. Please go ahead.
Yeah. Hey, guys. I just wanted to make sure I'm sort of understanding the correct rationale here. If I heard it correctly, you guys are generally saying that this is mostly driven by the financial side of the business here, and you guys basically look at it and you see the financial side improves a lot on a combined basis over the next decade here, and clearly pointing to the ability to raise the base dividend, but also to pay the variable dividend. You guys also did mention shareholder buybacks. Maybe you could talk a little bit to the preference for these different ways to return capital to shareholders as a combined company.
Yeah, Leo, let me kick it off. I'll turn it over to Dan. You cannot decouple the financial side from every other aspect of our business. The financial side is an output of a great organization and great assets. The rationale for this is more on the former. The financial is the outcome of best-in-class assets and best-in-class organization. With that, I'll let Dan comment.
Well, in looking at the platform that's built, Leo, we had a question on optionality, what do we do with capital allocation. When you look at the Upstream. There we go.
When you look at upstream and what the future is, what investors are looking for, and you consider now the generalist, what they're looking for, and you look at the platform that's going to be built, we think with the synergies of this organization, the scale, and what we're going to be able to return when you look across not just the upstream space, but when you look across the other industries, that our deliverables with this combination, not just the sheer numbers on the financial metrics, but our deliverables with the return profile are going to be stellar within the upstream space, but also going to be stellar in a generalist look across the platform. One of the concerns when you look at a commodity-based platform for deliverables might be it is a commodity base, and you deal with variables.
One of the things that this combination has done is mitigated some of the variability, and through cycle, we think we have underpinned a dividend, a return to shareholders, that is going to go across some of the variables that we've seen. Just take this last year, the variability we have seen in commodity strip. We're going to mitigate that, and we think with that, we can attract the long-term investors that we both look for. We think with a long-term investor, we'll share in the upside that this organization's going to build.
Okay. That's helpful. I guess I just wanted to follow up on one of the comments you folks made as well. Obviously, you'll be a bigger company going forward with solid financial footing. Y'all did mention with the potential to play some offense as well going forward. Can you provide a little bit more color on that? Are you guys perhaps signaling that there could be other consolidation opportunities down the road?
Well, let me just say this. Each organization has different strengths, and each asset has different strengths. Yeah, I'll speak personally. I come from a background, the Cimarex organization inherently is multi-basin. We've got tremendous organizational depth around taking best learnings from each basin and applying it to the other. We're a top operator in multiple basins because we're a multi-basin company, and we know how to do this. This is placed to our strengths organizationally, and we're going to continue to be on the hunt. We're going to continue to be opportunistic, and we're going to continue to be financially disciplined. Now, those are not mutually exclusive, but when they come together, it's rare, and that's what this combination is about for us.
It's a rare combination where we have opportunistic ability to find assets that are equal to our own in quality and yet do so with financial discipline. We're going to continue to look for those opportunities, and we have the organization to tear things apart.
I might add, Tom Jorden, that when you look at, again, the platform built, Leo Mariani, both companies have spent a lot of time for years evaluating strategic opportunities to enhance shareholder value. We do it on a regular basis. Looking at a combination of this magnitude that gives us that flexibility to look at even more opportunity in the future, I think is an optionality that we have. I think the capital discipline that's been displayed over the years, over and over and over, that we're going to be prudent in that decision, and we're going to make the decisions that for a long term is going to be most beneficial for the shareholder.
Thanks, guys.
The next question comes from Jeanine Wai with Barclays. Please go ahead.
Hi. Good morning, everyone. Thanks for taking our questions.
Hi, Jeanine.
Hi. Good morning. My first question is on the base decline and the corporate breakeven. Can you talk about how these will change going forward versus Cimarex standalone? On our estimates, you were already pretty competitive with the go-forward breakeven, but we just wanted to see if these will change or improve on a pro forma.
Jeanine, we have discussed our maintenance capital being about $35 oil or less and $2 gas. We see that as kind of a maintenance capital or a price deck where maintenance capital can be sustained. Our decline rate, as Cimarex and combined company, will moderate further. It looks like in the low mid-30s on a BOE basis on a decline rate as we go out to the future.
Okay, great. This would have been more competitive than Cimarex standalone?
Yeah, definitely, Jeanine.
Okay, great. Maybe just too, on the presentation, you mentioned growth and a sustainable dividend. It says that you're committed pro forma to growing over time. Can you provide a little more color on what level of growth you're targeting and how this pertains to oil but also for gas?
Jeanine, we'll be providing more financial outlook in October or whenever we close this transaction. We're committed to a growing dividend. I think both companies behavior over time. I don't think that leaves that issue in question. We'd like to come forward with a more fulsome answer to that question, and we'll be doing so when we roll out.
Great. Thank you very much. The next question comes from Neal Dingmann with Truist Securities. Please go ahead.
Morning, guys. Thanks for the time. Tom, my first question, I understand, I guess from what I would say, from Cabot's number one rationale to do the deal, I think certainly picks up some nice inventory upside. On the Cimarex side, I'm just wondering if you had to be pinned to say that the number one primary reason as part of a Cabot, what you would throw out there as the number one reason.
I've been clear on that, Neil. It builds a better company. It just flat out builds a better company. One of the frustrations in E&P is this commodity rollercoaster. That's particularly something that a single commodity, single basin company is susceptible to, because then you're not only susceptible to the commodity rollercoaster, you're susceptible to marketing rollercoaster, and you're susceptible to asset performance rollercoaster. As I look at the challenges of our time, and I want to be clear on this is not a transaction around 2021. This is a transaction around the 2020s and into the 2030s.
As I look at the challenges of our time, having the ability to sustain our performance over all of the things that swing around us, whether it's commodity cycle, whether it's basin differentials, whether it's asset performance, whether it's regulatory environment, whether it's demands of ESG, Shale 3.0 demands. All of those challenges become easier to face in this combined platform. We have a better organization. We have tremendous opportunity for some highly talented people. We have the best assets in our business, and we have the best financial position in our business. This company is built for the long term, and we're going to thrive in a way that either one of us singly couldn't say. That's why we're doing this transaction.
No, well said, Tom. Just one follow-up, if I could. It's interesting, your prior comment about that you'd continue to remain on the offensive. I guess my question, you definitely will have ample inventory. Is it just your point to remain on the offensive just to take advantages of the market? Or why remain on the offensive given the obviously ample inventory you'll have sort of post the combination?
With our organizational capability from both sides, if there are assets that are more valuable in our hands than there are in others, we're going to jump at it because that's value creating for our owners. Stay tuned. We're going to be hard at work building this organization. We know how to do this. It's hard work. It's exhausting. We know how to do this. We have it all lined up, and we're going to perform over time. I'm very, very confident that we're going to be presenting to the industry the best organizational performance in our business. That tends to be a magnet for quality assets. They'll be more valuable in our hands than others.
Neil, I might just add on that aspect, and looking at opportunity out there, the bar is high to find those quality assets that will compete with such a good inventory that this combined company has. With a high bar, it just enhances the challenge, but it nevertheless illustrates how good assets we have as a company and the free cash flow allocation and the deliverables with the current assets. It's an ongoing part of an upstream E&P company's business is to continue to look for other opportunities, but they have to compete. We've set a high bar, but we still continue to compete and look for the opportunities.
Thanks for the add, Dan. Thank you both for the time.
The next question comes from Michael Scialla with Stifel. Please go ahead.
Good morning, everybody, congrats. Just to follow along on the opportunities. Tom, I know you mentioned in the past you've had a lot of conversations. I'm sure a lot of things were presented to you that had more immediate operational synergies. You're talking about staying on the offensive here. I'm just wondering post this deal, how you look at maybe some of those opportunities. Does this improve your currency to go back for some of those things that might have had more operational synergies than what you're going to realize from this deal, or how do you view those post this transaction?
Well, Mike, I don't want to comment on any particular opportunity, but we see things that we like. Dan said it well, the bar is high. Stay tuned. We'll be active. We'll be active developing our own assets, but we do have the organization capacity to look over the fence. There's a lot of quality assets in our business. Quite frankly, as I said earlier, I think there are assets that would be better in our hands than others.
Okay. Just curious on, I'm sure you had a lot of oil assets and probably oil-weighted companies in the Permian that you could have combined with. Does this reflect any view longer term on your preference for natural gas versus oil?
I wouldn't read anything there. We really like both commodities, and I've openly said you wouldn't want to follow me on my predictions on where the commodity's going. We like having diversity, and that's been my experience in this business, is having a good diverse exposure to both natural gas, natural gas liquids, and oil is the best way to play this. I know others see it differently, and that's what makes this business fun. When you look at the stability of our combined cash flow through commodity cycles, you just have to say, "Wow." This thing, as I've said to our organization for years, we're building an ark, not a party boat, and this new company is an ark.
Thank you.
The next question comes from Paul Cheng with Scotiabank. Please go ahead.
Thank you. Hey, Tom, on the synergy G&A, you guys targeted 18 months to two years. I think most of the other transactions that we have seen often find the target for 12 to 18 months. You said that you guys are ultra-conservative here or that we have upside in terms of accelerating those gains. Secondly, Dan, I think in your presentation, you're talking about migrating some of the volatility, part of the gain plan or the two-year hedging. The company is very different going forward than in the past. You're going to reinvest at a much lower rate, and you have a far stronger balance sheet. Realistically, why we really need hedging? Shouldn't hedging become a far smaller component of your future plan than, say, in the past? Thank you.
Well, I'll take that last one first. I've said publicly that we all have short memories, and if you remember what things looked like a year ago or 14 months ago, to think that we would be saying today that hedging isn't really a part of our core strategy, I think is bizarre. This transaction in and of itself is a hedge. We'll still have hedging as a part of our strategy. As far as your question on G&A goes, this combination really is unique. It's unique in that it's two very strong organizations, and we're going to, through the combination, preserve the best organizational capability of both. Some of the transactions that one would quote, you would say one or other companies were dismembered.
The thing that Dan and I both love about this transaction is we get to build a new company that has the best elements of both. We're going to be thoughtful on that. We're going to ask ourselves tough questions. We're going to be rolling up our sleeves. If you look at the runway on that G&A synergy, that's because we're going to take the time required to really preserve the best of both and roll out the absolute best company in our sector.
Thank you.
The next question comes from David Deckelbaum with Cowen. Please go ahead.
Morning, Tom and Dan. Congrats on the deal.
Thanks, David.
Thanks, David.
I know a lot's been asked already. I wanted to follow up a little bit. You talked about this deal sort of acts as a hedge. As we think about the go forward, one, the $4.7 billion of cumulative free cash through 2024, I just want to clarify that assumes sort of this kind of like $1.1 billion-$1.2 billion of maintenance CapEx on a multi-year basis. Just as a follow-up to that, just curious, you highlighted some very large windows of resiliency, down to $40 and $2.25 gas, $60 plus. There's obviously an attractive free cash component that comes at those levels. When you think about this as sort of a natural hedge, I guess, does this decrease your likelihood of hedging going forward?
Should we expect some variability in how you're allocating capital between asset bases and commodity environments? Or does this set up for more of a steady state holding a line on rig programs?
Well, David, you asked a lot of questions there. I will say we have some really bright financial minds in the combined company, and we will be tearing apart a hedging strategy. We will have a hedging program. Both of us currently have fairly modest hedging programs. We have the balance sheet to take that commodity risk. I would expect that our combined strategy will not be too dissimilar from our individual strategies. As far as capital allocation goes, you're within a good fair way of that capital model. We're going to have flexibility. One of the things that is exciting to me is, we're going to have the opportunity, and again, we haven't formed our capital plans yet. We're going to have the opportunity to accelerate a little in the Permian. We have tremendous assets. Over time, we're out of the chute.
We've got a nice revenue mix between oil and natural gas liquids and natural gas. I'd probably, over time, like to balance that up a little more on the oil revenue, and we have that opportunity. One of the many things I love about this combination is it does allow us to preferentially take that cash flow and accelerate a little in the Permian. Again, we'll be providing more color on that outlook when we provide further details closer to closing. All of this is in play, and it's exciting every way you look at it. We'll have tremendous options here.
I appreciate that, Tom. Just the last one for me. It's a bit of housekeeping, but you guys talked about setting up this company for the next decade or so. I think it's interesting in this combination with Dan as Chairman and Tom, you taking over as CEO, the pro forma. Am I correct in assuming that there isn't a change of control triggering payouts here for some of the top executives?
Yeah, Dave, actually in the merger agreement, we'll be laying more of that out. There will be some change of controls on both companies, but you'll get more details out of the filings.
Thanks, Mark.
The next question comes from Harry Mateer with Barclays. Please go ahead.
Thanks. Good morning. First one for me, I'm cognizant that credit ratings are an output of financial policy, not an input. I do think it would help bondholders to get a bit of a sense from management about what are your credit ratings targets. We know what the leverage target is, but do you intend to run this company as investment-grade entity? Any specific ratings within investment grade that you might be expecting on the back of this?
Yeah, I'll turn that over to Mark. There's no question that we intend our credit statistics and ratings to improve here, or at least hold flat. That'll be a decision of others, not ours. Our metrics across the board, every way you look at it, improve here. You can look at the way Dan and I have run our companies. I don't think you're going to see us decrease those financial metrics over time. Mark, you want to comment?
Yes, certainly. As both companies, as Tom said, we have a very long track record of conservative financial posture, low leverage. This deal will be pleasing. We have a public rating on the Cimarex side. We'll be working with the agencies to provide a rating for the new company. With the diversification, the strength of the balance sheet the companies are coming together with, I think it'll be very positive to the agencies relative to what our current rating is. Again, we'll be working with the agencies going forward and expect investment-grade rating, and continue to work with them and see if we even can raise it from there.
Okay, thank you. Just a follow-up to that. Cabot, you used the private placement market for bonds, you had an RBL on your facility, despite the fact you have low leverage and IG-type metrics. Cimarex, unsecured revolver, no RBL, public bonds. How should we think about financing of the company going forward? Is it going to look more like Cimarex or more like Cabot going into this?
Yes. We're still working through some of that logistics. We'll be coordinating our efforts on that. We will be looking to have a public rating on the combined new company. I would expect that likely we're going down the path of public notes over time.
Okay. Thanks very much.
Well, I want to thank everybody for your questions. You've asked all the right questions. I want to finish where I started. In our business, a quality company is defined by, first and foremost, the quality of the organization, the quality of the assets, and the quality of your financial strength. We are building with this transaction the very best company in our business. It is fit for purpose with the challenges of our time. This is a company uniquely positioned to address the demands of Shale 3.0, but also the environmental, regulatory, and commodity pressures that our industry will be under. We are really excited about what we've announced today. Stay tuned. This will be a company on the move, and Dan and I are thrilled to partner and create this new company. Thank you.
I concur 100% with the opportunity and the level of excitement on getting together, and again, answering more of the solid questions that have been laid out. I think when everybody just gets their arms around this combination, and you line it out and you look at the organization across the space, it's going to be a compelling story in very many of the metrics that all of us look at. Thank you again for the questions, and we look for more to come.
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