Deal frenzy swells with Diamondback’s $8.4 billion shale buy
NEW YORK/HOUSTON Diamondback Energy’s agreement to buy Energen in an US$8.4 billion all-stock deal makes it official: The longawaited Permian Basin buying spree has arrived, promising to shake up the U.S. shale industry.
Some US$30 billion in transactions this year centre on the Permian, where pipeline shortages and other hurdles have boosted costs, adding fresh momentum to the push for consolidation. In March, Concho Resources agreed to pay US$9.5 billion including debt for RSP Permian. In July, BP said it would spend US$10.5 billion across three U.S. shale plays, including the Permian.
“There will be further consolidation over time for sure,” said Leo Mariani, an Austin-based analyst at NatAlliance Securities.
At the end of last year, Energen owned drilling rights for about 150,000 acres across the Permian, which stretches across West Texas and New Mexico. The driller was “undervalued” amid a tussle with three activist investors, Mariani said in a telephone interview.
The US$84.95 per-share price represents a 16 per cent premium to Energen’s closing price Tuesday. Diamondback will also assume US$830 million in Energen debt in a deal approved by both boards, the Midland, Texas-based company said in a statement Tuesday.
Analysts have long predicted a wave of consolidation in the Permian, a remote region where the drilling renaissance was pioneered by dozens of independent wildcatters. Output in the basin is expected to rise to 3.42 million barrels a day in September, according to Energy Information Administration forecasts, more than double the production five years ago.
“Our industry has transformed into a manufacturing business and those operators that convert resources into cash flow at the lowest cost will win in the long run,” Diamondback Chief Executive Officer Travis Stice told analysts on a conference call Wednesday.
Diamondback shares fell 10 per cent to US$120.13 at 9:45 a.m. in New York; Energen, based in Birmingham, Alabama, jumped 4.4 per cent to US$76.37.
The move comes a week after Diamondback announced it was buying closely held Ajax Resources for US$1.2 billion in cash and stock, the holder of rights to 25,000 Permian acres. The two deals are set to make Diamondback the third-biggest producer in the Permian among companies focused on the region, the company said.
In July, PricewaterhouseCoopers predicted that the second half of 2018 would see a boom in oil and natural gas mergers and acquisitions, given that deal making conversations already were “at a fever pitch” following a slow down in M&A earlier in the year.
Activists including Carl Icahn, Paul Singer’s Elliott Management Corp. and Keith Meister’s Corvex Management had pressed Energen to seek a buyer, arguing its management had failed to wring full value from its acreage in the heart of the Permian. Corvex last year moved to call a special meeting of shareholders to remake Energen’s board, prompting a lawsuit from the company. The two sides announced a settlement in March.
Meister praised the deal on Tuesday, saying it delivers “significant” gains for Energen shareholders.
Energen started life as an Alabama natural gas utility, but shifted its main focus to exploration and production after acquiring drilling rights in the Permian. It agreed to sell Alabama Gas Corp. to the Laclede Group for US$1.28 billion in cash in 2014 to raise money to accelerate drilling.