Diamondback Energy Set to Become a Large-Cap Permian Player

Diamondback Energy–Energen merger

There has been speculation that US E&P (exploration & production) companies have started reducing their focus on the Permian region due to the significant widening of the WTI (West Texas Intermediate) spreads resulting from pipeline constraints in the region.

Diamondback Energy (FANG), a pure-play Permian E&P company, has put an end to this speculation with its recent announcement to acquire Energen Corporation (EGN) in an all-stock deal valued at $9.2 billion. This includes $830.0 million of net debt at Diamondback Energy.

Diamondback Energy Set to Become a Large-Cap Permian Player

This is the third major deal announcement this year that’s focused on the Permian region. Earlier this year, Concho Resources (CXO) acquired RSP Permian in a transaction valued at $9.5 billion. BP Plc (BP) recently announced the acquisition of BHP Billiton Limited’s (BHP) onshore assets in three US shale plays, including its assets in the Permian region.

Diamondback Energy

The combined entity is currently valued at $27.0 billion. Pioneer Natural Resources (PXD), Concho Resources (CXO), Continental Resources (CLR), Devon Energy (DVN), and Hess Corporation (HES) are other E&P companies with enterprise values of $20.0 billion–$40.0 billion.

Diamondback Energy has pro forma net Permian acreage of 390,000. Out of this, 259,000 acres comprise Tier One Permian acreage. Tier One acreage refers to assets with the potential to generate an “IRR greater than 50% at $60 WTI in at least one zone,” as noted in the related investor presentation. In terms of basin location, Diamondback Energy would be active in 7,072 net Permian locations.

Management commentary

According to Travis Stice, Diamondback Energy’s CEO, “The Energen team has done an outstanding job assembling a portfolio of Tier One acreage in both the Midland and Delaware basins, which, when combined with Diamondback’s current portfolio, will present an extended runway for Diamondback’s record of best-in-class execution and low-cost operations.”

Stice added, “I expect the pro forma company to be able to grow at industry leading rates while returning capital at a competitive yield.”

In the next article, we’ll look into Diamondback Energy’s pro forma production and production forecast.