Diamondback/Endeavor deal puts pressure on US shale consolidators

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The quest to buy prime assets in the US Permian Basin resembles a game of musical chairs. ExxonMobil, Chevron and Occidental Petroleum have all struck big deals in the shale patch since October. Large acquisition targets have become scarce commodities. One fewer seat remains. On Monday, Diamondback Energy swooped in to buy Endeavor Energy Resources for $26bn, including debt.

Endeavor is one of the few large private Permian operators​​ left after Occidental acquired CrownRock for $12bn in December. While the latter was owned by private equity, Endeavor is family-owned. That meant convincing its octogenarian billionaire Autry Stephens to sell — no mean feat. Plus, Diamondback, whose market capitalisation is about $27bn, rushed in ahead of larger rival ConocoPhillips.

Diamondback’s cash and share offer has something for both sides. Endeavor receives a good chunk of cash upfront. Diamondback will keep the cash outlay down using shares.

It has offered up 117.3mn of its own shares (worth $17.8bn based on Friday’s closing price) and $8bn in cash. Endeavor shareholders will own 39.5 per cent of the combined company after the deal closes. Its own financials were not disclosed but Endeavor should contribute about 43 per cent of overall oil and gas production.

The Midland-based company is acquiring a high-quality asset that will transform it into the third-largest producer in the Permian Basin of West Texas and New Mexico. The two companies combined produced 816,000 barrels of oil equivalent a day during the fourth quarter of last year, behind Exxon and Chevron.

One of the biggest concerns surrounding Diamondback is its falling drilling inventory in the Midland Basin. Meanwhile, Endeavor has one of the largest in the Permian. 

Based on Endeavor’s fourth-quarter production numbers, Diamondback is paying the equivalent of $73,654 per barrel of oil equivalent for Endeavor. That is similar to what Occidental paid for CrownRock. But Diamondback has arguably struck the better deal given the significant operating and capital cost savings forecast.

The annual synergies of $550mn touted — taxed and capitalised — are worth more than $4.2bn, covering more than half of the offer’s cash component. These look feasible given the two companies are headquartered across the street from one another. The pair’s oilfields are also close to each other, which could keep capital expenditure down. Diamondback has snagged a chair of its own. That means the music can only play so long for the remaining shale consolidators such as ConocoPhillips.