Permian Power Play: Diamondback Drills Big With $26B Merger

Diamondback Energy Inc FANG disclosed a definitive merger deal with Endeavor Energy Resources, L.P. for around $26 billion, inclusive of Endeavor’s net debt. 

In particular, the transaction comprises around 117.3 million shares of Diamondback common stock and $8 billion of cash, subject to customary adjustments. 

Diamondback Energy plans to fund the cash portion of the consideration through a combination of cash in hand, borrowings under its credit facility, and proceeds from term loans and senior notes offerings. 

Consequently, the company’s existing stockholders are expected to own about 60.5% of the combined company, and Endeavor’s equity holders rest of the company.

The transaction, unanimously approved by the Board of Directors of Diamondback and Endeavor, will create a premier Permian independent operator.

The combined company will have a pro forma scale of around 838,000 net acres and 816 MBOE/d of net production and high inventory depth and quality with about 6,100 pro forma locations with break evens at <$40 WTI.

Synergies: The deal will offer annual synergies of $550 million representing over $3.0 billion in NPV10 over the next decade, and expects accretion of ~10% free cash flow per share in 2025.

Diamondback’s Board of Directors raised a 7% increase to its base dividend to $3.60 per share annually ($0.90 per share quarterly), effective for the fourth quarter of 2023.

Guidance: Diamondback expects average production of 273.1 MBO/d (462.6 MBOE/d) and cash capital expenditures of $649 million for fourth quarter 2023.

Also, for FY24, the company projects to generate oil production of 270 – 275 MBO/d (458 – 466 MBOE/d) on a stand-alone basis, with a total capital budget of about $2.3 – $2.55 billion.

Starting in the first quarter of 2024, Diamondback plans to decrease its return of capital commitment to at least 50% of free cash flow to stockholders (vs. at least 75% of free cash flow earlier).

On a pro forma basis in 2025, Diamondback sees oil production of 470 – 480 MBO/d (800 – 825 MBOE/d) with a capital budget of around $4.1 – $4.4 billion, implying significant pro forma cash flow and free cash flow per share accretion.

The company anticipates the merger to close in the fourth quarter of 2024, subject to customary closing conditions.

Post deal closure, Diamondback will pen a stockholders agreement with the former equity holders of Endeavor, as per which, the former Endeavor equity holders will be subject to certain standstill, voting and transfer restrictions and will be provided with certain director nominations rights and customary registration rights with respect to the shares of the company issued to them as a part of the transaction.

Travis Stice, Chairman and Chief Executive Officer, said, “This is a combination of two strong, established companies merging to create a ‘must own’ North American independent oil company. The combined company’s inventory will have industry-leading depth and quality that will be converted into cash flow with the industry’s lowest cost structure, creating a differentiated value proposition for our stockholders.”

“The decision to reduce our return of capital to stockholders reflects our Board’s desire to increase financial flexibility and pay down debt added through this combination. Our near-term objective is to reduce pro forma net debt below $10 billion very quickly, ensuring balance sheet strength and best-in-class credit quality.”

Diamondback will report fourth-quarter results on February 20, 2024.

As of September 30, 2023, Diamondback had $680 million in standalone cash and no borrowings under its revolving credit facility, with approximately $1.6 billion available for future borrowing under the facility and had consolidated total debt of $6.4 billion.

Price Action: FANG shares are trading higher by 0.93% at $153.15 premarket on the last check Monday.