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Oil and Gas: Diamondback and Endeavor's $26 Billion Merger Redefines Permian Basin
02/14/2024
- The new entity, valued at over $50 billion, will unite two major Permian Basin operators in the U.S.'s largest oil-producing area.
- Post-announcement, Diamondback's shares increased 3% to $156, still 9% below their all-time high in October.
- Diamondback Energy's acquisition of Endeavor Energy Resources for $26 billion will form the third-largest oil company in the Permian Basin.
- The deal includes 117.3 million Diamondback shares and $8 billion cash, with the new company expected to produce 816,000 barrels per day across 838,000 net acres.
The new company formed from the merger will be valued at over $50 billion and can produce 816,000 barrels of oil and gas each day.
Diamondback's buyout of Endeavor happened about four months after ExxonMobil and Chevron made huge deals, with Exxon buying Pioneer Natural Resources for $59 billion and Chevron getting Hess for $53 billion. Even though 2023 was a slow year for company buyouts and mergers, with the total deals at $3.2 trillion (the lowest since 2013 and 47% less than the $6 trillion peak in 2021), the energy sector was still active. Experts think this buzz in energy deals is because these companies made a lot of money in 2022.
Key Background
Last year's merger wave in the shale sector revealed that U.S. energy companies might end up being more disciplined in production than OPEC+. This theory was supported recently when Diamondback Energy announced its acquisition of Endeavor Energy, a private Texas oil and gas producer, for $26 billion in cash and stock. This deal positions Diamondback as the third-largest oil producer in the Permian Basin and it becomes the largest operator focused solely on the Permian.
To finance the acquisition, Diamondback will use 117.3 million shares and $8 billion in cash. Diamondback shareholders will control 60.5% of the merged entity post-deal, with the remaining ownership going to Endeavor's shareholders.
"Eventually there will be non-core asset sales. We still have some significant joint-venture interest...the Delaware Basin is going to get less capital than as a percentage of total than it did previously. But we're not a forced seller."
- CFO Kaes Van't Hof
Fewer wells would be required to maintain production levels in 2025 and beyond, as both companies can operate efficiently using Diamondback's cost structure.
In recent months, Exxon acquired Pioneer Resources for about $60 billion, Chevron purchased Hess Corp for approximately $53 billion, and Occidental Petroleum took over CrownRock LP for around $10.8 billion.
In Midland, Texas, the core of the Permian Basin, Diamondback Energy, and Endeavor Energy are merging. Their combined output will be 816,000 barrels daily, outpacing Marathon Oil Corp. and Devon Energy Corp and behind Exxon-Pioneer's 1.3 million barrels and Chevron's 867,000 barrels in the Permian Basin.
Endeavor operates across approximately 350,000 net acres in the Midland area of the Permian Basin. It anticipates producing 350,000 - 365,000 barrels of oil equivalent per day in 2024.
Diamondback secured an $8 billion bridge loan from Citigroup Inc. for the acquisition, which includes a $1.4 billion termination fee. Following the closure, Diamondback plans a debt offering between $5 billion and $6 billion.
The purchase of Endeavor marks a strategic win for Diamondback. Endeavor, established by shale pioneer Autry Stephens, stands out among smaller Permian operators and has drawn interest from industry giants like Exxon Mobil Corp., Chevron Corp., and ConocoPhillips.
According to Dan Pickering, a shale finance veteran, the assets of both companies complement each other well, enhancing efficiency in crude production. This move allows Diamondback to remain competitive and independent amidst the merger trend. With the merger, the company will use fewer drilling rigs but still aims for future growth, noted Diamondback President Kaes Van’t Hof.
Diamondback plans to wrap up the deal by the end of this year. The Permian Basin is crucial for U.S. oil, helping the country outdo Saudi Arabia's production by 45% last year, thanks to its cost-effective and quick drilling. Even with the world trying to use less oil, demand is still expected to grow until 2030 and maybe even after that.
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Who's Next after Diamondback? Potential Takeover Targets in the Permian Basin
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
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.
OXY has been the leader in Permian Basin production for the past five years. Currently, the Houston-based oil and gas company is deepening its presence in the basin with a $12 billion acquisition of CrownRock, adding over 94,000 acres in the Midland Basin and increasing its oil output by about 170,000 barrels per day. Occidental announced an increase in its proved reserves to 4.0 billion barrels of oil equivalent by the end of December 2023, up from 3.8 billion the previous year. Activities in the Permian largely fueled this rise. Occidental added approximately 303 million barrels through infill development projects as well as new discoveries and the further development of existing fields brought in another 153 million barrels.
TotalEnergies kicked off 2024 with a net income of $5.7 billion in the first quarter, marking a modest 3% increase from the same period last year and a 13% rise from the previous quarter. This growth occurred despite experiencing drops in both the volume and price of gas sales over the year and the quarter. Their adjusted net earnings, which exclude one-time or unusual items, were $5.1 billion. This represents a significant 22% decline compared to last year and a slight 2% drop from the last quarter. The company's earnings before tax, depreciation, and amortization reached $11.5 billion, while their cash flow from operations significantly decreased to $2.2 billion, falling by 58% from last year and a steep 87% from the previous quarter. TotalEnergies also recorded $644 million in impairments.
New Mexico leads the Rockies region in gas production and ranks as the sixth-largest in terms of active gas wells in the U.S. Last year, the state's gas well count slightly increased by 0.2% to 30,699, with new additions in both the northwestern San Juan Basin and the southeastern Permian Basin. Meanwhile, just to the north in Colorado, gas producers grew by a modest 0.1% to 30,322, primarily due to increased drilling activity in the DJ and Piceance basins. Wyoming saw a decline in its active gas wells by 3.7%, down to 17,006, with production mainly in Sublette, Sweetwater, and Converse counties reflecting stable or slightly reduced drilling activity. Utah also experienced a slight decrease of 0.2% in its number of gas wells, totaling 6,463. In Q1 2024, oil and gas industry activity in Oklahoma, Colorado, and northern New Mexico experienced a decline. This marks the fifth consecutive quarter of contraction in drilling and business activities within these regions. According to a survey that included responses from 33 firms operating in the Rockies, this downtrend is expected to continue over the next six months.