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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 struck big deals in the shale patch since October. Big acquisition targets have become rare commodities. One less seat left. On Monday, Diamondback Energy moved to buy Endeavor Energy Resources for $26 billion, including debt.
Endeavor is one of the few large private Permian operators remaining after Occidental acquired CrownRock for $12 billion in December. While the latter was owned by private equity, Endeavor is family-owned. That meant convincing his octogenarian billionaire Autry Stephens to sell, which is no easy task. Additionally, Diamondback, whose market capitalization is about $27 billion, moved ahead of its largest rival, ConocoPhillips.
Diamondback's cash and stock offer has something for both sides. Endeavor receives a good amount of money up front. Diamondback will keep cash outlay low using stock.
It has offered 117.3 million of its own shares (worth $17.8 billion based on Friday's closing price) and $8 billion in cash. Endeavor shareholders will own 39.5 percent of the combined company once the deal closes. Its own finances were not disclosed, but Endeavor should contribute about 43 percent of total oil and gas production.
The Midland-based company acquires a high-quality asset that will make it 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 per day during the fourth quarter of last year, behind Exxon and Chevron.
One of the biggest concerns surrounding Diamondback is the decline in its drilling inventory in the Midland Basin. Meanwhile, Endeavor has one of the largest in the Permian.
According to Endeavor's fourth-quarter production figures, Diamondback is paying the equivalent of $73,654 per barrel of oil equivalent for Endeavor. This is similar to what Occidental paid for CrownRock. But Diamondback has arguably achieved the best deal given the significant savings expected in operating and capital costs.
The touted $550 million annual synergies (taxed and capitalized) are worth more than $4.2 billion and cover more than half of the cash component of the offering. This seems feasible given that the two companies are headquartered across the street from each other. The pair's oil fields are also close to each other, which could keep capital expenditures low. Diamondback has gotten a chair of his own. That means the music can only play for so long for the remaining shale consolidators, like ConocoPhillips.
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