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Diamondback Energy’s $26 Billion Endeavor Acquisition Shakes Up Permian Basin

Last year, when the full extent of the unprecedented consolidation wave in the shale sector gradually became apparent, we speculated that when it's all said and done, US energy companies would have more production discipline than the OPEC+ cartel, and sure enough, today we got the latest confirmation when Diamondback Energy agreed to buy fellow Texas oil-and-gas producer, the closely privately-held Endeavor Energy, in a $26 billion cash-and-stock deal that will create the third-largest oil producer in the Permian, behind only Exxon and Chevron. It would also be the largest oil producer operating exclusively in the Permian.

Diamondback will fund the deal with 117.3 million shares and $8 billion in cash, the two Midland, Texas-based companies said in a statement Monday. Diamondback shareholders will own 60.5% of the company after the deal closes. Shareholders of Endeavor, which isn't publicly traded, will own the rest. The WSJ was the first to leak the deal over the weekend.

The agreement is the latest in a string of massive deals transforming the US energy landscape as companies push to line up future drilling sites and cut costs. Over the past four months, Exxon struck a deal to buy another shale giant, Pioneer Resources, for about $60 billion, Chevron Corp. agreed to buy Hess Corp. for about $53 billion and Occidental Petroleum Corp. agreed to buy CrownRock LP for about $10.8 billion.

The Financial Times noted that the deal would be a win for Diamondback over Conoco, which has also been a candidate for Endeavor, which the news outlet described as one of the most sought-after shale oil independents.

Acquiring Endeavor is a resounding coup for Diamondback after its failed attempt to acquire CrownRock last year. Instead, the independent was acquired by Occidental. Endeavor, which was founded by shale pioneer Autry Stephens, is one of the last remaining closely held producers in the Permian. It has attracted the interest of Exxon, Chevron and ConocoPhillips.

Stephens, who grew up on a watermelon-and-peanut farm and had to shut down almost all his rigs during the 2008 financial crisis, had a net worth of $14.8 billion before the sale to Diamondback was announced, according to the Bloomberg Billionaires Index.

Diamondback and Endeavor's assets compliment each other very well, paving the way for the combined company to produce crude more efficiently, said Dan Pickering, who is founder and chief investment officer of Pickering Energy Partners and helped finance the shale revolution.

"Their (drilling) inventory is extremely high quality that will make the combined companies a very attractive investment on Wall Street. I imagine it will be well received by the market on Monday," Andrew Dittmar, senior vice president at Enverus, told Reuters.

The two companies, headquartered across the street from one another in Midland, the heart of the Permian, will have a combined 838,000 net acres and have net production of 816,000 barrels of oil equivalent, according to the statement.
The move also appears to be somewhat defensive for Diamondback, putting the company in better position to survive the ongoing merger wave as an independent operator, according to Bloomberg Intelligence.

The deal, which includes Endeavor's net debt, has been approved by Diamondback's board. The company will fund the cash portion of it through a combination of cash on hand, its credit facility, term loans and bonds. Diamondback expects the deal to close in the fourth quarter.

As expected, Wall Street was quite excited about the transaction:

KeyBanc Capital Markets analyst Tim Rezvan

  • A possible Diamondback-Endeavor merger has "industrial logic and the reporting is credible"
  • "A reasonably priced acquisition could support current FANG valuations and merit another upward re-rate"

ROTH MKM analyst Leo Mariani

  • Endeavor's $25 billion valuation is lower than earlier reports for a "highly sought after set of assets"
  • "Endeavor is one of the most highly sought after deals remaining in the Permian Basin, so this is a bit of a coup for FANG"

Stifel analyst Derrick Whitfield

  • The deal would be fairly valued, given "the modest productivity uplift demonstrated by Endeavor's wells"
  • Bottom line is that "we're positively inclined on the rumored transaction"

RBC Capital Markets analyst Scott Hanold

  • "If this transaction occurs, we expect FANG to rationalize some of its less core focus assets, such as the Delaware Basin"

The Diamondback-Endeavor merger extends a series of megadeals that began with Exxon's acquisition of Pioneer Natural Resources last year, followed by Chevron's purchase of Hess Corp., and several smaller-scale but still nine-figure deals.

According to oil analysts, the shopping spree in the Permian play will continue as drillers rush to secure future production by expanding their acreage inorganically through acquisitions.

The Permian Basin, straddling West Texas and New Mexico, is the cornerstone of oil-production growth in the US. The nation's output surged to a record high last year - besting Saudi Arabia by about 45% - thanks largely to wells in the Permian that can be drilled and fracked cheaper and faster than those in many other regions.  Oil remains in high demand globally despite efforts to transition away from it, with consumption expected to rise through 2030 - and perhaps beyond.


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