Over the past five years, WPX Energy Inc. (NYSE: WPX) has evolved from a company producing an 80-20 mix of natural gas to oil to a company that now produces 80% liquids and 20% natural gas. On Monday, WPX announced that it will add about 60,000 barrels per day to its liquids production through the acquisition of privately held Felix Energy.

WPX has agreed to pay $900 million in cash and $1.6 billion in new stock paid to Felix Energy’s owners. The company plans to fund the cash portion of the deal by issuing $900 million in senior notes “on an opportunistic basis.” WPX also has received committed financing from Barclays and “has full access” to a $1.5 billion revolving credit facility.

The company expects to issue 153 million WPX shares valued at $1.6 billion, based on the 10-day volume-weighted average price as of last Friday. The transaction is subject to customary closing conditions and approval of WPX shareholders. The deal is expected to close in the second quarter of 2020. WPX will add two members to its board of directors from private equity firm EnCap Investments, the founder of Felix Energy.

In November, WPX laid out a five-year plan that Chair and CEO Rick Muncrief referred to on Monday as “the absolute standard and benchmark for any investment we make.” At that time, the company said it posted free cash flow in the third quarter of $42 million against a five-year target of 7% to 10% annually (currently 4% annualized). WPX’s projections assume a $50-to-$55-per-barrel price for West Texas Intermediate crude oil and $2.50 per thousand cubic feet of natural gas.

Muncrief said the Felix Energy acquisition, with average 12-month production ranging from 213,000 barrels per well to 260,000 barrels, “can accomplish these objectives for shareholders more quickly and efficiently … [and] ahead of schedule in a highly de-risked, leverage-neutral manner [that] is consistent with our opportunistic approach.”

In early October, Credit Suisse dropped WPX from its list of top picks in the oil industry. The analysts dropped WPX and added Parsley Energy, saying that they “expect relative outperformance from E&Ps that offer a combination of competitive growth, above-average [free cash flow] yields, willingness to return cash to shareholders, and attractive relative valuation.” At the time, WPX did not fit the bill.

In addition to boosting its free cash flow target last month, WPX also said it would continue its “opportunistic” share buyback program and target a dividend yield of 2% (the company currently pays no dividend).

Felix Energy holds leases on 58,500 net acres with approximately 1,500 drillable locations (at predominantly two-mile laterals) in the Wolfcamp and Bone Springs portions of the Permian’s Delaware Basin. Felix must also drill approximately 25 new wells in order to meet its lease obligations. About half of those are expected to be drilled in 2020.

Unusually, WPX has overcome the initial downside that comes with spending money that shareholders think ought to go to them and the shares were trading up nearly 10% at $11.98 in the mid-afternoon Monday. The stock’s 52-week range is $8.79 to $15.33, and the 12-month consensus price target is $15.36.

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