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Diamondback Buys Energen for $9.2B in the Permian Frenzy
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Indeed, Permian deal frenzy has swept the U.S. oil industry of late, bringing about a wave of consolidation in the prolific shale play. The latest energy company to join the bandwagon is Diamondback Energy, Inc. (FANG - Free Report) , which is set to acquire Energen Corporation in a mega $9.2-billion deal, in a bid to bolster its Permian presence.
Post the announcement of the deal, shares of Energen increased more than 2.8% to close at $75.20 on Aug 15. On the other hand, shares of Diamondback declined about 12% to close at $117.70, mostly as a reaction to the assumption of the takeover target's debt and concerns over slower expected growth. However, many analysts find the deal lucrative, owing to the synergies associated with the deal and the long-term opportunities it could provide.
Deal Details
The deal is valued at $8.4 billion in equity, wherein Diamondback will exchange 0.6442 shares of its common stock for each share of Energen. Diamondback’s bid represents around 19% premium to Energen’s closing share price of $71.36 on Aug 13, thus valuing Energen at $84.95 a share. The deal assumes Energen’s net debt estimated at $830 million, thus pushing the total value of the transaction to $9.2 billion.
Subject to satisfactory closing conditions, along with its shareholders’ consent and other regulatory approvals, the deal is set for closure by the fourth quarter of 2018.
Post the culmination of the deal, Diamondback will own 62% stake in the combined entity and Energen will hold the remaining 38%. The combined company is likely to be valued at around $27 billion.
Deal Motive
Diamondback’s core operations are focused on the prolific Permian basin, wherein it holds around 207,000 net acres, providing this upstream player with an enviable acreage of low-risk top-tier assets. The company has been strategically working to boost its presence further in the shale play. As such, it announced to purchase private-equity backed Permian player Ajax Resources LLC for $900 million in cash and around $300 million in stock.
The deal, which is set for closure by the end of October, will add around 25,493 net leasehold acres to Diamondback’s portfolio. Now, with the latest Energen buyout deal, Diamondback is all set to become the third-largest Permian explorer. Diamondback currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On the other hand, Energen is also one of the noted pure-Permian producers, having a vast portfolio of top-tier acreage in Midland and Delaware Basins. The company has successfully streamlined its portfolio by divesting its non-core assets over the past five years, thereby sharpening its focus and increasing drilling activities in the Permian Basin. In the last reported quarter, Energen recorded total production of 8,862 thousand barrels of oil equivalent (MBOE) compared with 6,596 MBOE in the prior-year quarter.
The complementary asset base has been the key driver of the deal. The buyout will integrate the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the region. The deal will enable the companies to pool their expertise in the region and share their best practices, thereby enhancing buying power in securing services in Permian.
Deal Benefits
The deal seems to be quite a prudent move by Diamondback, as it is likely to be immediately accretive to the company’s earnings, net asset value and cash flow. The agreement will add around 96,000 acres of tier-1 Permian acreage to Diamondback’s portfolio, expanding its position by 57% to a total of 266,000 acres. Net Permian acreage of the combined company will stand at around 366,000 acres.
Pro-forma production for the combined company in second-quarter 2018 was 222,000 barrels of oil equivalent per day (Boe/d), reflecting a 78% surge from Diamondback’s output of 124,700 Boe/d.
Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of asset, systems and staff. The deal is expected to result in synergies of around $3 billion. The transaction aims to reduce costs through economies of scale.
‘Permania’ Engulfs U.S. Oil Industry
Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. The region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters make year-round work possible. Oil production in the region has been recording significant growth, with the current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise another 2 million Bpd by 2025.
Last year, there had been a flurry of oil deals in the region owing to its attractive economics. Supermajors like Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) have been pouring in billions of dollars into the lucrative shale play. Other companies including Noble Energy Inc., Parsley Energy Inc. and Marathon Oil Corporation had inked strategic deals in 2017 to expand their Permian foothold. Oasis Petroleum Inc. also dived into Permian with $946-million acreage buyout in December 2017.
With crude prices rebounding, acquisition deals have picked up further pace with more than $30 billion transactions centered around Permian so far this year. In March 2018, Concho Resources Inc. inked a mega $9.5-billion deal to acquire RSP Permian. In July, BP plc acquired Permian assets worth $10.5 billion from BHP Billiton PLC. A few days back, Occidental Petroleum Corporation, in a bid to sharpen its focus on the prolific Permian, inked a $2.6-billion deal to vend its oil export terminal near Corpus Christi and a West Texas pipeline network. Diamondback-Energen $9.2 billion deal will boost the combined firm’s competitive positioning.
Will Consolidation Gain Further Momentum?
While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Due to pipeline capacity constraints, various producers have to sell their products at a discounted rate. Pipeline pinch along with other obstacles have led to an increase in consolidation activity, so that the companies can achieve economies of scale and synergies, thereby boosting their earnings and reducing competition for services. The small and mid-size companies are facing more pressure to secure pipeline transportation services, and hence are seeking ways to expand their scale and efficiency.
With crude prices finally rebounding to hover close to $70 per barrel since a couple of months, more and more oil producers are likely to enhance or capitalize their Permian portfolio.
Small and mid-cap companies operating in the region, including Abraxas Petroleum Corporation, Jagged Peak Energy Inc., Lilis Energy Inc., Resolute Energy Corporation, among others, could become effective targets for consolidation. With its relatively low break-even price, the hectic pace of land grab is set to continue in the Permian basin.
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Diamondback Buys Energen for $9.2B in the Permian Frenzy
Indeed, Permian deal frenzy has swept the U.S. oil industry of late, bringing about a wave of consolidation in the prolific shale play. The latest energy company to join the bandwagon is Diamondback Energy, Inc. (FANG - Free Report) , which is set to acquire Energen Corporation in a mega $9.2-billion deal, in a bid to bolster its Permian presence.
Post the announcement of the deal, shares of Energen increased more than 2.8% to close at $75.20 on Aug 15. On the other hand, shares of Diamondback declined about 12% to close at $117.70, mostly as a reaction to the assumption of the takeover target's debt and concerns over slower expected growth. However, many analysts find the deal lucrative, owing to the synergies associated with the deal and the long-term opportunities it could provide.
Deal Details
The deal is valued at $8.4 billion in equity, wherein Diamondback will exchange 0.6442 shares of its common stock for each share of Energen. Diamondback’s bid represents around 19% premium to Energen’s closing share price of $71.36 on Aug 13, thus valuing Energen at $84.95 a share. The deal assumes Energen’s net debt estimated at $830 million, thus pushing the total value of the transaction to $9.2 billion.
Subject to satisfactory closing conditions, along with its shareholders’ consent and other regulatory approvals, the deal is set for closure by the fourth quarter of 2018.
Post the culmination of the deal, Diamondback will own 62% stake in the combined entity and Energen will hold the remaining 38%. The combined company is likely to be valued at around $27 billion.
Deal Motive
Diamondback’s core operations are focused on the prolific Permian basin, wherein it holds around 207,000 net acres, providing this upstream player with an enviable acreage of low-risk top-tier assets. The company has been strategically working to boost its presence further in the shale play. As such, it announced to purchase private-equity backed Permian player Ajax Resources LLC for $900 million in cash and around $300 million in stock.
The deal, which is set for closure by the end of October, will add around 25,493 net leasehold acres to Diamondback’s portfolio. Now, with the latest Energen buyout deal, Diamondback is all set to become the third-largest Permian explorer. Diamondback currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On the other hand, Energen is also one of the noted pure-Permian producers, having a vast portfolio of top-tier acreage in Midland and Delaware Basins. The company has successfully streamlined its portfolio by divesting its non-core assets over the past five years, thereby sharpening its focus and increasing drilling activities in the Permian Basin. In the last reported quarter, Energen recorded total production of 8,862 thousand barrels of oil equivalent (MBOE) compared with 6,596 MBOE in the prior-year quarter.
The complementary asset base has been the key driver of the deal. The buyout will integrate the premier assets of both the companies, bolstering the scale and leadership position of the combined entity in the region. The deal will enable the companies to pool their expertise in the region and share their best practices, thereby enhancing buying power in securing services in Permian.
Deal Benefits
The deal seems to be quite a prudent move by Diamondback, as it is likely to be immediately accretive to the company’s earnings, net asset value and cash flow. The agreement will add around 96,000 acres of tier-1 Permian acreage to Diamondback’s portfolio, expanding its position by 57% to a total of 266,000 acres. Net Permian acreage of the combined company will stand at around 366,000 acres.
Pro-forma production for the combined company in second-quarter 2018 was 222,000 barrels of oil equivalent per day (Boe/d), reflecting a 78% surge from Diamondback’s output of 124,700 Boe/d.
Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies, due to the integration of asset, systems and staff. The deal is expected to result in synergies of around $3 billion. The transaction aims to reduce costs through economies of scale.
‘Permania’ Engulfs U.S. Oil Industry
Even during oil slump, the Permian Basin continued to turn out as a moneymaker for many of the oil producers owing to its low cost-high margin operational structure. The region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters make year-round work possible. Oil production in the region has been recording significant growth, with the current capacity of churning around 3 million barrels per day (Bpd), which is expected to rise another 2 million Bpd by 2025.
Last year, there had been a flurry of oil deals in the region owing to its attractive economics. Supermajors like Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) have been pouring in billions of dollars into the lucrative shale play. Other companies including Noble Energy Inc., Parsley Energy Inc. and Marathon Oil Corporation had inked strategic deals in 2017 to expand their Permian foothold. Oasis Petroleum Inc. also dived into Permian with $946-million acreage buyout in December 2017.
With crude prices rebounding, acquisition deals have picked up further pace with more than $30 billion transactions centered around Permian so far this year. In March 2018, Concho Resources Inc. inked a mega $9.5-billion deal to acquire RSP Permian. In July, BP plc acquired Permian assets worth $10.5 billion from BHP Billiton PLC. A few days back, Occidental Petroleum Corporation, in a bid to sharpen its focus on the prolific Permian, inked a $2.6-billion deal to vend its oil export terminal near Corpus Christi and a West Texas pipeline network. Diamondback-Energen $9.2 billion deal will boost the combined firm’s competitive positioning.
Will Consolidation Gain Further Momentum?
While production in the Permian is soaring, takeaway capacity is not increasing in proportion. Due to pipeline capacity constraints, various producers have to sell their products at a discounted rate. Pipeline pinch along with other obstacles have led to an increase in consolidation activity, so that the companies can achieve economies of scale and synergies, thereby boosting their earnings and reducing competition for services. The small and mid-size companies are facing more pressure to secure pipeline transportation services, and hence are seeking ways to expand their scale and efficiency.
With crude prices finally rebounding to hover close to $70 per barrel since a couple of months, more and more oil producers are likely to enhance or capitalize their Permian portfolio.
Small and mid-cap companies operating in the region, including Abraxas Petroleum Corporation, Jagged Peak Energy Inc., Lilis Energy Inc., Resolute Energy Corporation, among others, could become effective targets for consolidation. With its relatively low break-even price, the hectic pace of land grab is set to continue in the Permian basin.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>