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Diamondback’s $26bn Acquisition of Endeavor

By Aanjay Patel, Augustus Paluzzi, Samuel Tainsky, Nathaniel Baker, Michelle Liu (Cornell University) ; Sean Millar, Ben Preece, Moritz Ibe (University of St Andrews)


Photo: Marcin Jozwiak (Unsplash)

 

Overview of the deal


Acquirer: Diamondback Energy, Inc

Target: Endeavor Energy Resources, L.P

Implied Equity Value: 

Total Transaction Size: $26bn

Expected closing date: Fourth quarter 2024

Target advisor: J.P. Morgan and Goldman Sachs (financial), Paul, Weiss, Rifkind, Wharton & Garrison LLP and Vinson & Elkins LLP (legal)

Acquirer advisor: Jefferies, Citi (financial), Wachtell, Lipton, Rosen & Katz (legal)


On February 12th, 2024, Diamondback and Endeavor announced that they would enter a definitive merger agreement worth approximately $26bn. This cash-and-stock transaction is inclusive of Endeavor’s net debt and will consist of $8bn cash and 117.3m shares of Diamondback common stock. The merger between these two rivals represents a substantial consolidation within the Permian Basin, creating a combined oil-and-gas giant worth over $50bn. The pairing of high oil prices and the desire to secure prime land was a source of fuel for this deal. The pro forma scale of approximately 838,000 net acres created through this agreement positions the combined company to be a dominant player in the Permian Basin. $550m of annual synergies are expected over the next decade, which specifically include capital allocation, operating and capital costs, and corporate and financial expenses. This deal follows other massive and recent M&A in the energy sector, such as Exxon and Pioneer ($60bn), Chevron and Hess ($53bn), Occidental Petroleum and CrownRock ($10.8bn), and Chesapeake Energy and Southwestern Energy ($7.4bn).


“Diamondback has proven itself to be a premier low-cost operator in the Permian Basin over the last 12 years, and this combination allows us to bring this cost structure to a larger asset and allocate capital to a stronger pro forma inventory position” - Travis Stice, CEO (Diamondback)


Company Details (Acquirer - Diamondback Energy)


Diamondback Energy is a leading independent oil and natural gas company focused on the acquisition, development, exploration, and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin. With a strategic approach and low-cost structure, Diamondback is committed to delivering sustainable growth for its shareholders. The firm operates almost entirely within Texas and New Mexico across 3 different areas, the Delaware Basin, Central Basin Platform and the Midland Basin. Their main office is located in Midland, TX.


Founded in 2007, headquartered in Midland, Texas

CEO: Travis D. Stice

Number of employees: 1023

Market Cap: $33,043 billion (as of 03/03/2024)

EV: $32,676 billion

LTM Revenue: $8,395 billion

LTM EBITDA: $6,156 billion

LTM EV/Revenue: 5.0x

LTM EV/EBITDA: 6.5x

Recent Transactions: Acquisition of Firebird Energy LLC



Company Details (Target - Endeavor Energy Resources)


Endeavour is a privately-held oil exploration and production company. The company remains dedicated to enhancing its primary assets through the adoption of cutting-edge drilling and completion methods, aimed at decreasing drilling duration, reducing lease operating costs, and attaining unprecedented production levels. Endeavour’s operations span about 350,000 net acres in the Midland portion of the Permian Basin in North America and it expects to produce some 350,000 to 365,000 barrels of oil equivalent per day in 2024.

 

Founded in 2000, headquartered in Midland, Texas

CEO: Lance Robertson

Number of employees: 1200+


Projections and Assumptions


Short-term consequences


The short term consequences of this acquisition first and foremost are consolidation in the shale oilfield region. This acquisition comes amid rapid consolidation from a variety of different oil firms such as Exxon and Chevron, and may encourage other oil producers to look to horizontally integrate. For Diamondback in the short term this acquisition will allow the firm to ramp up production of oil and increase its domestic presence as an oil producer. This means that the firm will have more leverage in both the M&A space and the oil industry more broadly moving forward. Following the acquisition Diamondback’s share price surged, prompting interest from firm’s like Shelton Capital Management and BluePath Capital Management which each now hold a significant stake in the firm. Moving forward this may mean that the firm’s leadership may be diluted by outside investors and also that more outside capital may be injected into the domestic oil space as other investors seek returns. For the short term this means that firm’s like diamondback can expect an increase in outside investment interest as energy investors are buoyed by more potential M&A in the space. Broadly speaking the merger is estimated to generate an annual $550 million dollars of savings through resource cloistering and improved margins. Overall, This acquisition will have a wide range of downstream impacts for both the firm and the oil and gas sector as a whole.


Long-term Upsides


Diamondback's acquisition of Endeavor presents numerous strategic advantages for the long-term. The combined entity will emerge as one of the largest players in the US shale industry, reinforcing their dominant position in the Permian Basin. This not only facilitates revenue growth but also drives margin expansion. Leveraging Diamondback's cost-effective business model, the merger aims to extend this efficiency to larger assets, bolstering the pro forma inventory. With approximately 6,100 locations and a break-even point below $40 WTI, the combined entity boasts best-in-class inventory depth and quality. The strategic benefit of the merger is further evidenced by the substantial cost and revenue synergies estimated at $550 million annually, representing a $3.0 billion NPV10 over the next decade. Detailed breakdowns indicate approximately $325 million for capital and operating cost synergies, $150 million for capital allocation and land synergies, and $75 million for financial and corporate cost synergies. Financial projections suggest that the merger is poised to deliver long-term financial accretion, with around a 10% increase in free cash flow per share expected by 2025, and a strengthened balance sheet. In line with projected higher revenues and enhanced business prospects, Diamondback has announced a 7% increase in its base dividend to $3.60 per share, effective from the fourth quarter of 2023. Both leadership teams emphasise that this strategic merger positions the combined entity for sustained growth, financial resilience, and enhanced returns for shareholders.


Risks and Uncertainties

 

When it comes to the merger between Diamondback and Endeavor, there are numerous risks as a result of both external and internal factors. Some of these risks include global conflicts, legislation surrounding oil within the United States, as well as fluctuating oil prices.


Currently, global conflicts, such as the Russian-Ukrainian and Israel-Hamas Wars, have disrupted global stability. Due to Diamondback and Endeavor being located within the United States, its shipment of oil to locations worldwide is heavily dependent on United States foreign policy. With foreign policy being difficult to predict when considering global market trends, profitability goals anticipated through this deal may be unreachable due to unforeseen global altercations and wars. Furthermore, growing concerns surrounding climate change can mean the possibility of future domestic legislation restricting the amount of oil that can be produced during a period of time.


There is also a risk in regard to the fluctuating price of oil and its effects on supply and demand. Diamondback and Endeavor cannot control the cyclical nature of oil commodities. As a result of these changes, the merger may result in earnings far lower than the quantity predicted during both company’s financial analyses. If any form of restriction occurs, there is a likelihood that the newly formed conglomerate will not be as successful as desired by its shareholders.

 

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