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Anticipated Growth: Endeavor Energy's Value Nearing $30 Billion
11/27/2023![Anticipated-Growth-Endeavor-Energy-s-Value-Nearing-30-Billion](https://images2.rextag.com/public/blog/206Blog_Endeavor Energy’s Value Nearing 30 Billion.png)
This summer, J.P. Morgan Securities highlighted Endeavor Energy Resources as the Midland Basin's standout in mergers and acquisitions, suggesting its value might approach $30 billion.
Endeavor Energy Resources, a privately-owned entity in Midland focusing solely on its operations, has seen a significant uptick in production. It now boasts a production rate of 331,000 barrels of oil equivalent per day (boe/d), marking a 25% increase from the previous year.
Fitch Ratings provides a new perspective on Endeavor, and when compared with Exxon Mobil's valuation of Pioneer Natural Resources (another Midland-focused company), it seems Endeavor's market value could hit the $30 billion mark. This estimate is based purely on quantitative data, setting aside the brand recognition that a company like Pioneer might have.
For context, Exxon Mobil's valuation of Pioneer is based on:
- A payment of $89,500 per flowing boe/d
- Pioneer currently averaging 721,000 boe/d
- Holding 900,000 net acres
- The all-stock deal by exxon values pioneer at $64.5 billion, debt included.
In comparison, Endeavor averages a production of 331,000 boe/d and has 350,000 net acres to its name, with a current gross debt of $907 million.
Fitch notes that Endeavor's leasehold includes about 9,800 economically viable future horizontal drilling locations at $60 per barrel.
In contrast, Pioneer is estimated to have around 11,000 such locations at over $55 per barrel, while Endeavor stands at about 4,500 at the same price.
Both companies maintain leverage below 0.5x EBITDA. Fitch's recent report and an October update on Pioneer confirm this.
Endeavor's production comprises 57% oil, as reported by Fitch. Pioneer, in its third-quarter 10-Q filing for 2023, notes that its production is 53% oil. Endeavor's total liquid production, including natural gas liquids (NGLs), stands at 80%, while Pioneer's NGL production was 25% of its total in the third quarter, bringing its total liquid production to 78%.
Fitch has also provided data on Endeavor's operating costs, which have improved significantly to $9 per boe/d, down from $15.40 per boe/d in 2017, a year after it began focusing on horizontal drilling and large-scale fracturing. This cost efficiency is among the best in Fitch’s E&P peer group, as noted by analysts Daniel Michalik and Mark Sadeghian, who also affirmed Endeavor’s BBB- rating.
The Highest Margin
- Endeavor's netback, unhedged, stands at $38.30 per boe, an 81% margin, the highest in its peer group.
- This is attributed to a high content of approximately 80% liquids, strong realized prices, and a competitive cost structure. In comparison, Pioneer's unhedged cash netback is $34.10 per boe/d, as reported by Fitch in October.
- Other companies' netbacks include Marathon Oil at $25.10/boe, Continental Resources at $30.90/boe, APA Corp. at $27.80/boe, and Diamondback Energy at $34/boe.
Michalik and Sadeghian commend Endeavor’s management for its ability to grow while controlling drilling and exploration costs and boosting overall returns, despite inflationary pressures.
Looking ahead, Fitch anticipates Endeavor’s free cash flow to reach $1 billion in both 2024 and 2025, assuming a base-case oil price of $70 next year and $65 in 2025. About 10% of its 2024 oil production is hedged at $70, with associated gas — about 20% — at $3.25.
The company’s debt-to-EBITDA ratio is expected to stay below 0.5x, akin to Devon Energy, through 2027. Endeavor has $907 million in senior unsecured notes due in 2028.
Moreover, Endeavor has an untapped bank credit facility of $1.5 billion and holds $1.9 billion in cash.
In 2021, the company paid off $500 million of its senior notes due in 2026. The following year, it retired another $600 million in senior notes due in 2025 using its free cash flow, as per a 2022 Fitch report.
The analysts suggest that Endeavor’s free cash flow could be channeled towards potential mergers and acquisitions. However, Fitch’s BBB- credit rating assumes no such activity.
Factors potentially elevating the rating include steps to mitigate corporate governance-related risks. Endeavor, wholly owned by founder Autry Stephens since 1979, lacks independent board members. However, the company is progressively moving towards professional management, which includes
Over 1,000 Wells and Strategic Acquisitions in Texas
Endeavor Energy Resources owns a significant tract of land, primarily located in Martin, Midland, and Reagan counties in Texas. The company is currently operating over 1,000 horizontal wells across this largely continuous area. As of mid-October, Endeavor had 13 drilling rigs in operation.
Recent well completions, as reported by J.P. Morgan Securities, have been noteworthy. These include:
- In Martin County 11 wells on the Kronos lease, which have shown impressive initial production (IP) rates of 1,040 barrels of oil equivalent per day (boe/d), with 84% being liquid forms.
- In Midland County, 12 wells in the "Interstate" unit averaged 1,654 boe/d with 87% liquids, and 22 wells on the Fasken property averaged 1,317 boe/d with 89% liquids.
In 2022, J.P. Morgan reported that Endeavor’s drilling results yielded 11.24 barrels of oil per lateral foot. This performance placed the company fourth, ahead of Ovintiv's 11.02 but trailing behind Chevron (12.50), SM Energy (12.24), and APA Corp. (11.43).
Endeavor's mineral rights division, 1979 Royalties, has recently expanded its holdings. The unit acquired approximately 5,000 net royalty acres in Martin and Dawson counties from Peacemaker Royalties, supported by EnCap Investments, for a sum of $61 million. Much of this surface acreage is operated by Endeavor and Ovintiv.
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Who's Next after Diamondback? Potential Takeover Targets in the Permian Basin
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The $26 billion purchase of Endeavor Energy Resources by Diamondback Energy, with its stock up 2.6%, is the newest big deal combining oil and gas production in the Permian Basin under a few big companies
Occidental, CrownRock Merger Under Regulatory Review: 2024 Update
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CrownRock's 94,000+ net acres acquisition complements Occidental's Midland Basin operations, valued at $12.0 billion. This expansion enhances Occidental's Midland Basin-scale and upgrades its Permian Basin portfolio with ready-to-develop, low-cost assets. The deal is set to add around 170 thousand barrels of oil equivalent per day in 2024, with high-margin, sustainable production.
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The pipeline industry in the USA faced and still faces a range of regulatory challenges, including permitting delays, environmental requirements, and public opposition to pipeline projects. In recent years, pipeline projects like the Keystone XL and Dakota Access pipelines had legal and regulatory obstacles that delayed or canceled their construction. Keystone XL Pipeline, proposed by TransCanada in 2008, aimed to transport crude oil from Canada (around Calgary and Edmonton) to refineries on the Gulf Coast (Port Arthur). The project faced opposition from environmental groups and indigenous communities, who argued that it would contribute to climate change and pose a risk to water resources. In 2015, President Obama rejected the project, citing concerns about its environmental impact. However, in 2017, President Trump revived the project, leading to further legal challenges. In June 2021, U.S. President Joe Biden officially canceled the project on his first day in office.
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The renewable natural gas (RNG) industry in the United States is showing promising signs of growth. As of 2019, the U.S. consumed 261 billion cubic feet (BCF) of RNG, primarily utilized by independent power producers, electric utilities, and various commercial and industrial entities. However, this figure represents only a small fraction of its potential. Research indicates that the U.S. could theoretically produce up to 2,200 BCF of RNG through anaerobic digestion alone, which would equate to about 11% of daily national natural gas consumption.
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Recently, the progress toward an energy transition is hitting a snag. Sales of electric vehicles are decelerating, and the growth in wind and solar power needs to be keeping pace with expectations. To make matters more challenging, electricity prices are climbing when they were expected to fall. Amidst these setbacks, the oil and gas sectors are proving resilient. According to BP's latest energy outlook, not only are these energy mainstays here to stay, but their demand is expected to remain relatively high even after reaching a peak. Interestingly, BP forecasts that oil demand will reach its zenith next year, marking a critical moment in energy consumption trends. This isn't the first time BP has projected a peak in oil demand. Back in 2019, their review anticipated a decline in demand growth, but the prediction fell flat. Instead, oil demand surged to unprecedented levels following the end of the global pandemic lockdowns, defying previous forecasts and underscoring the enduring dominance of traditional energy sources in the global market.